1, 


ml 


<>  * 


PRACTICAL    PROBLEMS     IN 
BANKING    AND    CURRENCY 


*M& 


\ 


Practical  Problems  in 
Banking    and    Currency 

BEING  A  NUMBER  OF  SELECTED  ADDRESSES  DELIVERED 

IN  RECENT  YEARS  'BY  PROMINENT  BANKERS, 

FINANCIERS    AND     ECONOMISTS 


Edited  by 

WALTER  HENRY  HULL 


With  an  Introduction  by  the 

HONORABLE  CHARLES  FRANCIS  PHILLIPS 

of  New  York 


jReto  #ork 
THE  MACMILLAN  COMPANY 

LONDON:  MACMILLAN  &  CO.,  Ltd. 
I907 

AU  Riihtt  Rtirrv,d 


Copyright,  igo7 

By  THE  MACMILLAN  COMPANY 

Set  up  and  electrotyped.     Published  March,  1507 


THE     MASON-iJENRY     PRESS 
SYRACUSE,      N.     Y. 


I 

$7 


PREFACE 


A  few  months  ago  the  editor  had  occasion  to  investigate  several 
.  addresses  delivered  by  prominent  bankers  and  economists,  and  as 
an  outgrowth  of  this  study  he  decided  to  compile  a  number  of  the 
more  important  and  valuable  of  these  into  book  form,  believing  such 
a  work  to  be  a  significant  addition  to  banking  literature.  He  was 
further  encouraged  in  this  work  by  the  assurance  of  both  bankers 
and  educators  that  such  a  compilation  would  be  welcomed  as  a 
reference  book  in  connection  with  studies  in  banking  and  currency. 

That  the  bankers'  associations  of  this  country  have  accomplished 
much  that  is  praiseworthy  from  an  educational  view-point  remains 
unquestioned.  Their  annual  conventions  have  been  devoted  to  the 
discussion  of  practical  problems  as  they  affect  actual  conditions.  If 
the  currency  question,  the  trust  company  controversy,  or  any  other 
vital  topic  was  confronting  the  general  banking  situation,  it  was 
sure  to  receive  consideration  at  some  bankers'  convention  by  an  able 
*  authority,  trained  through  years  of  experience.  As  a  result  we  find 
association  proceedings  containing  many  excellent  papers  treating 
subjects  that  standard  works  on  banking  have  either  omitted  or 
inadequately  handled. 

The  addresses  contained  in  this  volume  cover  the  period  since 
1900.  The  years  since  that  date  have  been  remarkable  for  several 
reasons.  First,  the  perennial  currency  agitation  has  made  several 
strides,  that  is,  as  far  as  the  discussion  of  the  subject  is  concerned. 
The  controversy  over  asset  currency  and  branch  banking  has 
attained  prominence  that  previously  had  not  been  achieved.  Dur- 
ing the  years  1902  and  1903  this  contention  was  at  its  height,  and 
many  practical  bankers  and  students  of  finance  undertook  a  solution 
of  the  question.  The  lull  in  the  discussion  following  these  two 
years  was  only  temporary,  as  the  question  was  revived  in  1906,  and 
such  organizations  as  the  New  York  Chamber  of  Commerce  and 


5 


vi  PREFACE 

the  American   Bankers'  Association  diligently  sought  a  remedy  for 
the  monetary  evil. 

Second,  the  rise  to  prominence  of  the  trust  company  as  a  factor 
in  finance  created  considerable  discussion  both  from  a  positive  and 
negative  view-point.  With  the  popularizing  of  this  form  of  bank- 
ing naturally  came  the  accompanying  problems.  Many  difficulties 
that  never  had  menaced  the  commercial  or  savings  bank  were  left 
to  the  trust  company  for  solution.  That  this  form  of  banking  is 
here  to  stay  no  one  now  questions.  Its  advantages  are  its  freedom 
and  magnitude  of  scope,  characteristics  not  possessed  to  the  same 
extent  by  commercial  or  savings  banks. 

In  selecting  the  papers  to  be  contained  in  this  volume  the  editor 
deemed  it  prudent  in  several  instances  to  choose  more  than  one 
address  on  the  same  subject,  believing  that  the  reader  should 
be  given  an  opportunity  of  understanding  the  various  opinions  main- 
tained by  the  leading  authorities.  Especially  is  this  true  of  the  dis- 
cussions on  elastic  currency,  branch  banking,  bank  supervision  and 
one  or  two  additional  topics.  Questions  like  the  foregoing  of  vital 
moment  to  both  the  banking  interests  and  the  commercial  world 
can  be  solved  only  after  considerable  examination  and  sifting  on 
the  part  of  capable  and  experienced  men. 

It  has  been  a  source  of  deep  regret  to  the  editor  that  the  size  of 
the  volume  limits  the  number  of  addresses  to  be  contained  herein. 
There  are  many  papers,  carefully  prepared,  thorough,  lucid  and 
specialized  on  some  important  topic,  that  are  omitted  merely  on 
account  of  the  fact  that  the  volume  was  severely  crowded  for  space. 
Some  of  the  papers  originally  requested  for  publication  have  been 
omitted  also  for  this  reason.  If,  however,  there  appears  a  sufficient 
demand  on  the  part  of  those  interested  in  this  branch  of  commerce, 
it  is  hoped  that  the  conditions  will  be  favorable  for  the  publication 
of  a  second  volume,  by  means  of  which  a  large  mass  of  valuable 
material  may  be  brought  into  accessible  form  for  the  banker  or 
student  of  finance. 

The  editor  is  especially  indebted  for  valuable  assistance  and 
timely  suggestions  to  Professor  Herbert  J.  Davenport  of  the  Uni- 
versity of  Chicago  and  to  the  Honorable  Charles  G.  Dawes,  ex- 
Comptroller  of  the  Currency  and  President  of  the  Central  Trust 
Company  of  Illinois,  Chicago.     To  the  Honorable  Charles  Francis 


PREFACE  vii 

Phillips  of  New  York  City,  the  editor  wishes  to  acknowledge  his 
thorough  appreciation  for  contributing,  in  addition  to  his  address, 
the  Introduction.  President  S.  R.  Flynn  of  the  National  Live 
Stock  Bank  of  Chicago  and  Dr.  Robert  Morris  of  the  University 
of  Chicago  were  both  indulgent  in  giving  aid  and  encouragement 
at  the  time  the  volume  was  first  contemplated.  To  the  contributors 
as  a  body  the  editor  feels  deeply  indebted  for  their  courtesy  and 
willingness  in  giving  their  time  and  offering  ideas  that  made  the 
compilation  of  the  volume  a  much  easier  task. 

Walter  Henry  Hull,  Editor. 

The  University  of  Chicago 
December,  1906 


TABLE  OF  CONTENTS 

PAGE 

Introduction xiii 

By  the  Honorable  Charles  Francis  Phillips  of  New  York. 

GENERAL   BANKING    SECTION 

Business    Education   and   Commercial   and   Banking   Methods        .        3 

By    Henry    Clews    of    the    banking    house    of    Henry    Clews    and 

Company,  New  York. 
How   Foreign   Commerce   Benefits   the   American   Banker        .        .       15 

By  W.  L.  Moyer,  President  of  the  Mechanics'  and  Traders'  Bank 

of  New  York  City. 
Banking    Conditions    in    Wall    Street 23 

By  Thomas  F.  Woodlock,  with  S.  N.  Warren  and  Company,  New 

York. 
The  Relation  of  the  Banking  Capital  to  the  Volume  of  Business      37 

By  Professor  Frank  L.  McVey  of  the  University  of  Minnesota. 
Bank   Credits 43 

By  James  G.  Cannon,  Vice-President  of  the  Fourth  National  Bank 

of  New  York. 
Bank   Audits 56 

By  Seymour  Walton  of  the  firm  of  Buchanan,  Walton,  Joblin  and 

DeVor,  Chicago. 
Securities  that  are  not  Securities 62 

By  J.    T.    Bradley,   National    Bank    Examiner   and   Cashier  of  the 

First  National  Bank  of  Sedan,  Kansas. 
Requisites  of  a  Good  Loan 66 

By  E.  T.  Coman,  Cashier  of  the  First  National   Bank  of  Colfax, 

Washington. 
Payment  of  Interest  by  Discount  Banks  upon  Commercial  Deposits      77 

By  Frederick  D.  Kilburn,  ex-Superintendent  of  the  Banking  Depart- 
ment of  the  State  of  New  York. 
Bank    Defalcations — Their    Causes    and    Cures  ....      87 

By    Edward    P.    Moxey,    Expert    Bank    Examiner    for    the    United 

States,  Department  of  Justice. 
National   Bank   Examinations 97 

By   Joseph    Chapman,   Jr.,   Cashier   of   the    Northwestern    National 

Bank  of  Minneapolis. 
Where   was   tjie   Bank   Examiner? Jo6 

By   R.    S.   Flynn,   President  of  the   National   Live    Stock   Bank  of 

Chicago. 
Supervision  and  Publicity IX3 

By.  J.  A.  S.   Pollard,  Cashier  of  the  Fort  Madison  Savings  Bank, 
Fort  Madison,  la. 

ix 


x  CONTENTS 

PAGE 

The  Evolution  of  the  Banking  Law 121 

By  Thomas  B.  Paton,  Editor  of  the  Banking  Law  Journal,  New 
York. 

Financial    Advertising  y 134 

By  William  S.  Power,  President  of  the  William  S.  Power  Com- 
pany, Pittsburg. 

Bank   Advertising 141 

By  Francis  R.  Morison,  Auditor  and  Advertising  Manager  of  the 
Citizens'  Savings  and  Trust  Company,   Cleveland,  Ohio. 

BANKING   REFORM   AND    CURRENCY   SECTION 

Insuring  the  Deposits   in   National  Banks 149 

By  John  Schuette,  President  of  the  Manitowoc  Savings  Bank,  Mani- 
towoc, Wisconsin. 
Panic    Panaceas 163 

By  Andrew  J.  Frame,  President  of  the  Waukesha  National  Bank, 

Waukesha,  Wisconsin. 
Financial    Crises 175 

By  Theodore  E.  Burton,  Member  of  the  House  of  Representatives. 
Economic  Waste  of  our  Treasury  System 180 

By  Lyman  J.  Gage,  ex-Secretary  of  the  Treasury. 
Natural   Bank   Currency   and   National  Bank   Currency        .        .     187 

By  William  B.  Dean  of  St.  Paul,  Minn.,  Member  of  the  Indianapolis 

Monetary  Commission. 
The  Medium  of  Exchange  and  the  Banking  Function        .        .        .    205 

By  A.  B.  Stickney,  President  of  the  Chicago  Great  Western  Railway. 
Desirable    Changes    in    the    Banking    Law 222 

By  A.  B.  Hepburn,  ex-Comptroller  of  the  Currency  and  President 

of  the  Chase  National  Bank  of  New  York. 
Branch   Banking 238 

By  James  B.  Forgan,  President  of  First  National  Bank  of  Chicago. 
Branch   Banking 254 

By  Horace  White,  former  Editor  of  the  New  York  Evening  Post. 
Branch   Banking 271 

By  Henry  W.  Yates,   President  of  the  Nebraska  National   Bank, 

Omaha. 
Branch    Banking 282 

By  WTilliam  A.  Nash,  President  of  the  Corn  Exchange  Bank,  New 

York. 
Asset   Currency 290 

By  Horace  White,  former  Editor  of  the  New  York  Evening  Post. 
Emergency   Circulation 302 

By    Cornelius    A.    Pugsley,    President    of   the   Westchester   County 

National  Bank,  Peekskill,  New  York. 
The   Money    Supply   of  the    United   States 3°7 

By   James    B.    Forgan,    President   of   the    First   National    Bank  of 

Chicago. 
Gold    Reserve    National    Bank    Notes 3X4 

By  William  B.  Ridgely,  Comptroller  of  the  Currency. 


CONTENTS  xi 

PAGE 

Sound  Versus  Soft  Money -  •    326 

By  Andrew  J.  Frame,  President  of  the  Waukesha  National  Bank, 
Waukesha,  Wisconsin. 

Proposed  Changes  in  our  Banking  Laws 344 

By  Charles  G.  Dawes,  ex-Comptroller  of  the  Currency  and  Presi- 
dent of  the  Central  Trust  Company  of  Illinois,  Chicago. 

Bank  Note  Experience  of  Twenty  Years— 1882  to  1902        .        .        .359 
By  Horace  White,  former  Editor  of  the  New  York  Evening  Post. 

Strength   and  Weakness   of   American    Finance        ....    373 
By  Ellis  H.  Roberts,  ex-Treasurer  of  the  United  States. 

The  Bank  and  the  Treasury— The  Two  Great  Pillars  Supporting 

Our    Financial    System 381 

By  Frederick  A.   Cleveland,   Professor  of  Economics  in  the  New 
York  University  School  of  Commerce,  Accounts  and  Finance. 

Currency   Reform 396 

By  Leslie  M.  Shaw,  Secretary  of  the  Treasury. 

Currency   Reform 401 

By    John    L.    Hamilton,    ex-President    of   the    American    Bankers' 
Association. 

The  Monetary  Situation  and  its   Remedies 405 

By  Henry  Clews  of  the  banking  house  of  Henry  Clews  and  Com- 
pany, New  York. 

Pending  Financial  Legislation 4J3 

By   Charles   N.   Fowler,   Chairman  of  the   Committee   on  Banking 
and  Currency  in  the  House  of  Representatives. 

Reform    of   the    Currency    System 422 

By  James  H.  Eckles,  ex-Comptroller  of  the  Currency  and  President 
of  the  Commercial  National  Bank,  Chicago. 

Influence  of  the  Increasing  Gold  Supply  upon  Prices  and  the  Rate 

of  Interest  433 

By   Joseph    French   Johnson,    Dean    of   the    New   York   University 
School    of  Commerce,  Accounts   and  Finance. 

The    Financial  Outlook •  446 

By  Frank  A.  Vanderlip,  Vice-President  of  the  National  City  Bank, 
New  York. 

TRUST   COMPANY   SECTION 

The  Trust  Company  as  a  Factor  in  the  Finances  of  the  Nation    .    457 
By  Festus  J.  Wade,  President  of  the  Mercantile  Trust  Company, 

St.  Loui-,  Mo. 
National  Banks  and  the  Trust  Company  Problem      ....    462 

By  Eugene  E.  Prussing  of  the  law  firm  of  Prussing,   Brown  and 

King,  Chicago. 
Trust  Company   Failures ...    472 

By  A.  A.   Jackson,  Vice-President  of  the   Girard  Trust  Company, 

Philadelphia. 
Bust  Foreign  Countries  Analogous  to  that  of  Trust  Com- 

PANIES    IN    THE    United    States 478 

By  Charles  Francis   Phillips  of  New  York. 


jrfi  CONTENTS 

PAGE 

Investigation  and  Audit  of  the  Accounts  of  a  Trust  Company        .    489 
By  A.  O.  Kittredge,  C.  P.  A.,  of  New  York. 

Trust  Company   Forms 497 

By  Arthur  Heurtley,   Secretary  of  the   Northern  Trust   Company, 
Chicago. 

An  Element  of  Danger  to  Banks  in  Municipal  Bonds  as  Security    501 
By  Clark  Williams,  Vice-President  of  the  Columbia  Trust  Company 
of  New  York. 

The  Duties  and  Liabilities  of  Trust  Companies  Acting  as  Transfer 

Agents  and  Registrars 507 

By  Henry  J.  Bowdoin  of  Baltimore,  Md. 

The    Protection   of   Trust    Companies    as    Transfer    Agents    and 

Registrars 520 

By  Jordan  J.  Rollins  of  New  York,  Member  of  the  New  York  Bar. 

Power  of  Fiduciaries  Outside  of  the  State  of  Their  Appointment    537 
By    Frederick    Vierling,    Trust    Officer    of    the    Mississippi- Valley 
Trust  Company. 

The  Power  of  Attorney  from  Executors  and  Trustees,  from  the 

Viewpoint   of    the    Depositary 542 

By  Jordan  R.  Rollins  of  New  York,  Member  of  the  New  York  Bar. 

Duties   of    Trustees   of    Financial    Corporations        ....    553 
By    Willis    S.    Paine,    ex-President    of    the    Consolidated    National 
Bank  of  New  York  and  former  Superintendent  of  the  New  York 
State  Banking  Department. 

Essentials  Required  by  Trust  Companies  to  be  put  in  Mortgages 

and  other  Papers 556 

By  Andrew  Squire  of  Cleveland,  Ohio,  Member  of  the  Ohio  Bar. 

The    Proper    Conservative    Attitude   of    Trust    Companies    toward 

Corporate   Enterprises        ....  ....    563 

By  J.  E.  Borne,   President  of  the  Colonial  Trust   Company,   New 
York. 

The  Benefit  of  a  Real  Estate  Department  to  a  Trust  Company    .    566 
By  L.  A.  Anderson,  Vice-President  of  the  Mercantile  Trust  Com- 
pany, St.  Louis,  Missouri. 

The  Saving  Department  of  a  Trust  Company 571 

By  Thornton  Cooke,  Treasurer  of  the  Fidelity  Trust  Company  of 
Kansas  City,  Missouri. 

The  Advantage  of  Operating  Safe-Deposit  Vaults  in  Connection 

with  the  Trust  Company 576 

By  William  A.  Carr,  Secretary  and  Treasurer  of  the  Union  Safe- 
Deposit  Company  of  Pittsburg. 

Trust  Company  Advertising 580 

By  Richard  L.  Crampton,  Assistant  Cashier  of  the  National  Bank 
of  the  Republic,  Chicago. 


INTRODUCTION 


This  introduction  is  not  designed  to  be  a  commentary  on  the 
many  important  and  highly  interesting  articles  of  which  the  present 
volume  is  composed;  but  rather  a  brief  exposition  of  the  purpose 
which  has  prompted  their  publication,  and  a  suggestion  of  the  bene- 
fits to  be  derived  from  a  careful  study  of  the  conditions  which  they 
undertake  to  describe  and  to  analyze,  or  to  which  they  necessarily 
direct  attention. 

The  authors  of  these  articles  are  all  men  of  experience,  many  of 
them  distinguished  by  abilities  and  achievements  which  have  gained 
for  them  national,  and  even  international,  reputation.  They  are  all 
both  thinkers  and  workers,  accustomed  alike  to  solve  the  problems 
of  the  day  and  to  govern  the  enterprises  with  which  those  problems 
are  associated.  They  speak  with  authority ;  and  the  habits  of  prompt 
determination,  precise  action,  and  watchful  and  energetic  manage- 
ment, which  have  become  their  mode  of  life,  lead  them  to  write 
with  a  clearness  and  a  conciseness  which  make  it  easy  to  grasp  the 
ideas  they  enunciate  and  to  understand  and  apply  the  lessons  they 
desire  to  teach.  We  may,  therefore,  very  properly  allow  their  work 
to  speak  for  itself,  being  assured  that  it  will  meet  the  attention  and 
respect  to  which  it  is  entitled.  Moreover,  in  regard  to  both  theory 
and  practice,  it  covers  so  wide  a  field  of  observation,  discusses  so 
many  matters  of  present  moment,  and  offers  so  much  sound  and 
pertinent  advice,  that  it  cannot  fail  to  be  valuable  and  engaging 
from  whatever  point  of  view  it  may  be  regarded. 

But,  although  convinced  that  the  volume  now  going  forth  to  the 
public  will  be  sincerely  welcomed  by  a  large  number  of  alert  and  in- 
telligent readers,  and  will  be  profitably  studied  and  advantageously 
discussed  by  them,  we  yet  deem  it  a  duty  on  our  part  to  dwell  brief- 
ly, in  these  prefatory  pages,  upon  the  urgency,  and  even  the 
necessity,  of  a  very  serious  and  comprehensive  survey,  by  every 
man  of  affairs,  of  the  character  and  tendency  of  our  economic  life, 

*•• 

XIII 


xiv      PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

both  as  it  relates  to  ourselves  and  as  it  affects,  or  may  be  affected 
by,  the  ideas  and  practices  of  other  nations,  now  that  the  intensity 
of  material  development  and  the  struggle  for  commercial  supremacy 
which  distinguish  our  era  have  brought  the  whole  trading  world  into 
the  most  intimate  relations,  from  which  often  spring  the  keenest 
rivalries  or  the  sharpest  antagonisms.  Indeed,  one  of  the  main  pur- 
poses moving  us  to  the  task  we  have  undertaken  in  the  publication 
here  presented,  was  to  compel  a  thoughtful  comparison  of  our 
principles  and  methods  with  those  adopted  and  pursued  by  our 
competitors,  and  thus  to  place  under  contribution,  for  our  own  bet- 
terment and  progress,  the  wisdom  and  experience  of  every  people 
and  of  all  the  past.  Our  friends,  in  the  many  timely  and  enlighten- 
ing articles  which  they  have  put  at  our  service,  have  supplied  not 
only  the  ground-work  of  such  an  effort,  but  also  abundant  sugges- 
tion as  to  its  agreeable  and  effective  prosecution ;  and  we  feel  sure 
that  appreciation  of  their  good  will  and  generous  co-operation  can- 
not be  better  shown  than  by  making  their  work  the  medium  of  a 
broad  and  intelligent  view  of  the  best  contemporary  achievement 
and  of  a  close  acquaintance  with  the  creative  thought  and  the  fruit- 
ful endeavor  of  the  period. 

Whilst  there  is  very  much  that  we  may,  without  assumption, 
venture  to  teach  to  others,  there  is  undoubtedly  a  great  deal  more 
that  we  may,  with  advantage,  gather  from  their  instruction.  It  is 
therefore  well  that  we  should  look  carefully  into  our  own  situation, 
and  then  determine,  simply  and  without  prejudice,  to  what  extent 
it  may  be  improved  by  a  faithful  application  of  the  lessons  which 
can  so  readily  be  learned  from  those  who  were  old  in  labor  and 
struggle,  and  also  in  success,  long  before  we  had  begun  to  exist  as 
a  distinct  community  in  the  family  of  nations,  or  even  to  aspire 
vaguely  to  that  enterprise  which  now  distinguishes  us  in  a  manner 
as  marked  as  it  is  creditable. 

We  are  so  energetic  and  so  resourceful  a  people,  we  have  at  our 
command  so  many  opportunities  and  so  many  facilities,  we  are  so 
given  to  initiative  and  invention,  our  vast  territory  is  so  blessed  with 
natural  riches  of  every  kind  and  the  times  are  so  propitious  for  their 
exploitation,  our  political  and  commercial  relations  with  the  rest  of 
the  world  are  so  generally  favorable,  and  our  position  in  many 
respects  is  so  strategically  controlling,  that  we  have  become  much 


INTRODUCTION  xv 

too  prone  to  think  only  of  our  surpassing  prosperity  and  acknowl- 
edged power,  due  as  much  to  our  special  advantages  as  to  our  ad- 
mitted ability,  and  to  pay  little  attention  to  the  condition  toward 
which  that  prosperity  and  that  power  are  inevitably  and  persistently 
urging  us  onward.  The  truth  is,  that,  although  the  most  modern  of 
all  great  nations,  we  are,  in  consequence  of  the  trend  of  events  and 
from  sheer  necessity  in  what  concerns  many  of  our  interests,  steadily 
assuming  the  responsibilities  and  as  steadily  adopting  the  policies  of 
the  most  ancient,  and  are  facing  more  and  more  each  day,  in  govern- 
ment and  in  every  phase  of  industrial  and  social  life,  the  difficulties 
and  the  dangers  which  have  always  attended  widespread  dominion 
and  the  accumulation  of  enormous  wealth,  and  which  have  consti- 
tuted, throughout  all  history,  the  menace  of  sustained  peace  and  of 
the  higher  progress. 

Finance  is  not  an  isolated  factor.  Nothing  is  more  closely  as- 
sociated with  the  whole  range  of  contemporary  development,  and 
nothing  is  more  easily  complicated  by  general  conditions.  Whether 
for  good  or  for  evil,  it  affects,  and  is  affected  by,  the  morals,  laws, 
habits,  ambitions,  tastes,  traditions  and  wants  of  the  people  whose 
transactions  it  adjusts  and  whose  relations  it  so  largely  attempts  to 
shape  and  to  administer.  It  must,  therefore,  not  be  studied  from  a 
purely  formal  and  arithmetical  point  of  view,  but  from  that  of  the 
complete  activities,  needs,  prospects,  character,  and  connections  of 
the  community  whose  interests  it  serves.  Let  us  then  very  hastily 
scan  our  history  in  order  to  see  what  we  have  hitherto  accomplished, 
and  look  carefully  about  us  so  as  to  learn  what  we  have  to  do  at 
present  and  shall  be  compelled  to  undertake  in  the  very  near  future. 

To  give  oneself  heartily  to  such  an  effort  is  eminently  the  duty  of 
the  financier,  not  only  on  account  of  the  requirements  of  the  highly 
important  task  that  constitutes  his  daily  work,  but  because  of  the 
influence,  direct  and  indirect,  which  he  can,  and  in  some  respects, 
whether  so  disposed  or  not,  he  must,  exert  on  the  whole  movement 
of  his  time.  It  is  not  alone  with  money  and  credit,  with  the  clear- 
ings of  the  world's  commerce  and  the  support  and  extension  of  the 
world's  utilitarian  energies,  that  he  is  concerned  :  he  has  to  do,  and 
often  to  do  effectively,  with  matters  far  more  essential,  which  touch 
the  most  serious  interests  of  individuals  and  of  nations,  making  for 

ice  <>r  war,  for  prosperity  or  misery,  for  progress  or  retrogres- 


xvi      PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

sion.  He  has  a  vocation  that  is  among  the  most  important  of 
those  assigned  to  men  of  action,  and  by  his  fidelity  to  which  both 
humanity  and  Providence  will  very  strictly  judge  him,  as  well  in 
respect  to  what  he  accomplishes  as  in  respect  to  what  he  fails  to 
undertake. 

Within  a  very  brief  span  of  national  life  we  have  achieved  ex- 
traordinary things,  most  of  which  have  been  beneficent  and  fruitful, 
and  will  leave  their  impress  upon  the  ages  to  come.  They  apper- 
tain to  every  realm  of  human  accomplishment:  and  they  bespeak  our 
capacity  for  government;  for  material,  intellectual,  and  moral  im- 
provement ;  for  the  resolution  of  the  doubts  and  the  mastery  of  the 
difficulties  incident  to  all  salutary  progress;  and  for  the  conquest 
not  only  of  new  fields  of  enterprise  but  also  of  new  spheres  of 
wholesome  influence  and  elevating  example.  Our  advance  from 
primitive  conditions  has  been  as  rapid  as  it  has,  thus  far,  been 
certain  and  safe;  and  the  whole  world  wonders  that  we  should  so 
easily  have  triumphed  over  obstacles  which  have  often  arrested  the 
onward  march  of  the  most  enlightened  and  powerful  of  peoples,  and 
even  turned  backward,  at  times,  the  current  of  civilization.  Hence 
it  is  meet  that  we  should  be  exceedingly  thankful;  but  we  should, 
furthermore,  remember  that  the  strength  we  have  gained,  the  supe- 
riority we  have  in  many  respects  achieved,  the  vantage-ground  we 
have  so  brilliantly  conquered,  and  the  avenues  to  added  success 
which  the  genius  of  the  nation  is  steadily  opening  and  as  steadily 
broadening  with  each  successive  decade,  have  brought,  and  continue 
to  bring,  with  them  a  multiplicity  of  onerous  and  trying  duties,  of 
which  a  large  share  falls  necessarily  to  the  man  of  affairs,  and  which 
must  be  generously  discharged  lest  they  become  sources  of  peril  and 
reproach.  Should  failure  overtake  us  in  the  performance  of  our 
task  as  a  people,  it  would  be  impossible  to  plead  aught  in  extenua- 
tion of  it ;  and  were  we  to  show  ourselves  negligent  of  the  obligations 
we  have  been  only  too  anxious  to  assume,  it  would  be  more  than 
cowardly  to  take  refuge  in  excuses  based  on  pretended  inexperience, 
or  upon  the  novelty  of  a  situation  created,  as  ours  has  been,  by  a 
quick  succession  of  unusual  events  and  by  a  naturally  elicited  and 
manifest,  though  apparently  sudden,  call  to  a  special  mission.  We 
are  ever  ready  to  declare  that,  in  the  economy  of  Providence,  we 
have  been  selected  to  dominate,  in  great  measure,  the  destinies  of 


INTRODUCTION  xvii 

the  present  and  of  many  succeeding  centuries :  let  us  then  be  equally 
ready  to  acknowledge,  in  business  as  in  politics  and  in  all  other  con- 
cerns of  daily  life,  the  imperative  nature  of  the  vocation  we  admit 
to  have  been  ordained  in  our  regard,  and  to  work  out  the  plans 
suggested  by  it,  even  to  the  minutest  detail,  from  whatever  sources 
we  may  need  to  draw  inspiration,  to  seek  light,  or  to  borrow  the 
requisite  vigor  and  enthusiasm. 

We  have  taken  our  place  in  the  foremost  rank  of  nations,  and 
we  cannot,  if  we  would,  retreat  from  it.  Besides,  the  cares  and 
vicissitudes  of  the  old  world  have  now  become  equally  those  of  the 
new;  and  common  problems  have  to  be  solved  by  both,  with  such 
wisdom  as  the  former  has  gained  from  its  two  thousand  years  of 
civilized  life  and  the  latter  has  reaped  amid  the  ferment  of  a  phe- 
nomenal unfolding.  It  is  to  be  hoped  that  there  will  be  a  generous 
exchange  of  good  offices,  and  that  the  most  pronounced  rivalry  be- 
tween the  two  may  be  witnessed  in  the  attempt  of  each  to  surpass 
the  other  in  effecting  those  ameliorations  which  serve  to  diffuse,  as 
widely  as  human  possibility  allows,  the  benefits  to  be  got  from  the 
best  thought  and  the  bravest  endeavor  of  both. 

The  whole  world  has  reached  a  position  where  there  is  supreme 
need  of  greater  self-abnegation  on  the  part  of  the  strong  and  the 
fortunate,  and  of  greater  unselfishness  on  that  of  the  struggling 
mass ;  and  if  there  be  one  thing  more  useful,  more  largely  beneficent 
than  another,  which  can  be  accomplished  by  those  who  manage  the 
colossal  material  interests  of  the  times,  it  is  certainly  that  of  prevent- 
ing the  threatened  division  of  society  into  two  great  antagonistic 
classes,  one  of  which  seeks  with  the  keenest  ability,  the  most  sys- 
tematic vigilance,  and  the  nicest  manipulation,  to  secure  and  to  hold 
all  that  it  can  safely  get,  and  the  other,  with  less  knowledge  and  skill 
but  with  equal  determination,  to  take  all  that  it  may  dare  to  seize 
under  any  pretext  of  right  or  any  tolerance  of  aggression. 

The  social  problem  cannot  be  divided  from  the  economic ;  and 
the  banker,  the  merchant,  the  manufacturer,  and  the  agent  of  trans- 
portation, must  unite  to  create  and  maintain  that  reasonable  distri- 
bution of  opportunity,  of  advantage,  and  of  profit,  which  alone  can 
forestall  an  adjustment  that  left  to  itself  must  needs  assume  the 
character  of  a  revolution. 

But  before  we  undertake  to  ascertain  how  nearly,  in  any  given 


xviii   PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

case,  the  laws,  customs,  and  practices  of  any  other  country  may 
offer  us  suggestions  likely  to  prove  useful  in  solving  the  problems 
common  to  all  modern  communities,  or  those  specifically  related  to 
our  own  development,  we  should  do  well  to  regard  somewhat  care- 
fully the  elements  which  give  complexion  to  our  national  life,  and 
thus  learn  to  better  determine  how  nearly  the  needs  of  any  alien 
society  are  analogous  to  those  of  our  own,  and  how  opposite  in  our 
own  regard  may  prove  the  systems  of  work,  the  methods  of  busi- 
ness, and  the  treatment  of  issues,  which  experience  has  taught  it  to 
follow,  and  the  industrial,  commercial,  financial,  and  social  safe- 
guards which  its  observation  has  led  it  to  adopt. 

It  is  a  fact  too  often  overlooked,  even  by  the  well  informed,  that 
we  are  a  highly  composite  people,  gradually  moulding  ourselves 
into  a  new,  distinct,  and  eminently  characteristic  type,  and  that  we 
are  very  far  from  being  the  Anglo-Saxon  people  we  so  generally 
style  ourselves  from  simple  want  of  reflection.  Indeed,  the  number 
of  persons  other  than  those  of  English  descent  now  going  to  make 
up  our  population,  represents  undoubtedly  an  overwhelming  ma- 
jority of  the  whole.  Were  it  possible  to  eliminate  from  our  national 
composition  the  integral  parts  directly  contributed  to  it  by  the  Celt, 
the  Scandinavian,  the  Teuton,  the  Latin,  the  Hebrew,  the  Magyar, 
the  Slav,  the  Greek,  and  the  Armenian,  not  to  speak  of  some  less 
important  though  still  appreciable  elements,  and  not  to  take  account 
of  the  influence  exercised  in  so  many  ways  by  our  vast  negro  popu- 
lation, we  should  no  longer  be  recognizable  even  by  ourselves.  It 
may  almost  be  said  that  we  have  in  our  veins,  in  copious  measure, 
the  blood  of  all  the  strongest  and  most  determined  races;  and  we 
must  seek  to  profit  by  the  labors  and  wisdom  of  each  of  them1,  even 
when  the  issue  is  no  higher  than  that  of  mere  trade,  and  the  end  in 
view  nothing  more  exalted  than  the  simple  amassing  of  gain,  if  we 
would  secure  the  fullest  expansion  and  the  largest  efficiency  of  the 
force  we  have,  during  our  short  but  most  eventful  period  of  exist- 
ence, gathered  from  the  best  stock  of  all  mankind  and  made  native, 
let  us  believe,  for  all  time.  In  fact,  to  do  justice  to  ourselves  we 
should  constantly  reflect  that  it  is  precisely  because  of  our  composite 
character  that  we  occupy  so  unique  a  position  amidst  the  family  of 
nations ;  for,  along  with  the  brawn  and  the  brain,  we  have  absorbed 
a  generous  share  of  the  moral  excellence  of  substantially  every  peo- 


INTRODUCTION  xix 

pie  that  has,  since  the  beginning  of  modern  history  conceived  the 
ideas,  supported  the  trials,  executed  the  plans,  and  performed  the 
deeds  that  have  made  possible  the  world's  present  civilization ;  and, 
for  the  same  reason,  and  to  understand  more  fully  how  large  is  our 
responsibility,  we  should  as  sedulously  bear  in  mind  that  no  other 
people  than  ourselves,  among  all  those  now  contending  for  the 
leadership  of  humanity,  can  claim  a  like  genesis  or  pretend  to  so 
extraordinary  a  heritage. 

We  have  had  to  settle,  to  develop,  to  unify,  to  make  prosperous, 
to  fortify  against  the  eventualities  of  existence;  to  bring  into  har- 
monious and  profitable  relation  with  a  number  of  governments  by 
no  means  at  one  with  each  other  in  purpose  or  policy ;  to  train  to  a 
loyal,  prudent,  and  earnest  discharge  of  the  public  and  private 
duties  of  free  citizenship ;  and  to  supply  with  the  means  of  progress- 
ive enlightenment  and  of  all  the  embellishments  and  reasonable 
pleasures  of  life,  a  country  of  immense  extent  and  of  varying 
climate,  character,  fertility,  product,  and  environment:  and  for  each 
question  that  has  in  consequence  presented  itself,  we  have,  in  some 
one  or  more  of  the  qualities  of  our  population  resulting  from  special 
proclivities,  sentiments,  traditions,  or  experience,  found  prompt 
and  vigorous  aids  to  a  happy  solution.  Furthermore,  at  even- 
period  of  our  national  growth  and  of  the  unfolding  of  our  insti- 
tutions, now  in  many  particulars  regarded  as  models  of  general 
applicability,  we  have  stood  in  need  of  some  peculiar  force  or 
capacity  which,  in  union  with  other  and  equally  needed  forces  and 
capacities,  no  one  race  or  people  alone  could,  perhaps,  have  satis- 
factorily supplied.  We  have,  it  is  true,  retained  the  language  of 
England,  and  many  of  her  customs  and  laws — some  of  them  most 
precious  heritages;  but  the  debt  imposed  upon  us  by  our  national 
evolution  is  one  that  is  owing  to  all  the  world. 

But  this  fortunate  blending  of  so  many  excellencies  has,  in  spite 
of  its  advantages,  been  attended  by  some  difficulties  which  vet  re- 
main to  be  overcome.  It  has,  notwithstanding  our  wonderful 
power  of  assimilation,  in  certain  cases  delayed,  and  in  others 
rendered  arduous  and  imperfect,  the  achievement  of  that  social 
homogeneity  and  that  solidarity  of  thought  rind  working  purpose 
which  distinguish  the  older  peoples.  As  a  result,  our  attention  has 
been    temporarily   diverted    from   certain    ideals,    and    from    certain 


xx   PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

methods  of  development  and  procedure,  which,  in  view  of  our  high- 
est goml.  demand  our  study  and  crave  our  cultivation. 

The  events  which  created  us  a  separate  government  led  us,  at 
the  inception  of  our  national  career,  to  be  more  solicitous  for  in- 
dependence than  anxious  for  guidance.  We  were,  in  virtue  of  the 
circumstances  accompanying  our  origin  as  a  people,  given,  first 
by  the  force  of  occurrences  and  then  by  disposition,  to  a  free-* 
dom  of  policy  and  conduct  which  was  always  praiseworthy  but  not 
in  every  instance  sagacious ;  and  the  inclination  to  work  out  our 
destiny  with  as  little  extraneous  aid  as  possible  has,  notwithstanding 
our  incessant  drafts  upon  the  populations  of  all  Europe,  clung  to  us 
almost  as  a  principle,  even  when  we  might  have  largely  gained  by 
imitation  or  profited  by  example. 

Virility  we  possess  in  an  astonishing  degree,  and  we  have  ex- 
hibited it  so  thoroughly  and  so  persistently  that  we  have  placed  our- 
selves in  a  position  where  our  strength  and  determination,  associated, 
as  they  are  in  the  minds  of  the  whole  world,  with  our  undoubted 
resources,  and  our  phenomenal  facilities  for  the  creation  and  main- 
tenance of  both  power  and  influence,  command  the  respect  and 
constantly  invite  the  scrutiny  and  watchfulness  of  every  govern- 
ment and  of  every  interest.  But  as  we  have  reason  to  be  proud  of 
what  we  are  and  what  we  possess,  we  also  have  reason  to  be 
solicitous  to  correct  the  shortcomings  of  which  we  may  become,  or 
be  made,  conscious,  and  to  so  far  perfect  every  form  and  procedure, 
whether  of  politics,  education,  business,  or  social  life,  as  to  make 
available,  to  their  utmost  capacity,  the  blessings,  material  and  moral, 
which  it  has  pleased  a  beneficent  Providence  to  bestow  upon  us. 

During  the  colonial  period,  and  for  a  considerable  time  after  the 
achievement  of  our  independence,  we  pursued  in  politics,  in  busi- 
ness, and  in  the  general  concerns  of  life,  the  natural  and  quiet  course 
of  our  development,  much  as  other  nascent  communities  had  done 
before  us ;  but,  starting  from  the  close  of  the  Civil  War,  the  issue 
of  which  effected  a  most  important  and  far  reaching  change  in  the 
opinions  and  sentiments  of  our  people,  in  the  character  of  our  in- 
dustrial and  commercial  activities,  and  in  the  policy  of  our  govern- 
ment, we  suddenly  entered  upon  a  career  of  rapid,  and  almost  ag- 
gressive, material  and  political  advancement,  directed  by  principles 
of  centralization  and  expansion,  which,  as  might  easily  have  been 


INTRODUCTION  xxi 

anticipated,  only  served,  especially  after  our  triumph  in  the  Spanish- 
American  War  and  our  acquisition  of  distant  and  important  pos- 
sessions, to  excite  more  and  more  our  thirst  of  power,  our  desire  for 
the  prerogatives  of  empire,  and  our  longing  for  pre-eminence  among 
the  nations.  And  so  we  have  come  to  be  recognized  as  a  world- 
power,  to  be  credited  with  the  influence  attaching  to  the  status  we 
have  assumed,  and  to  be  charged  with  all  its  responsibilities. 
Latterly,  moreover,  our  progress  in  the  exploitation  of  our  country's 
resources  has  been  so  wonderful ;  our  population,  as  well  by  natural 
increase  as  by  ever  growing  immigration,  has  increased  so  much ; 
our  wealth  has  multiplied  so  enormously;  our  centers  of  activity 
have  become  so  densely  peopled ;  our  domestic  issues  have  given  rise 
to  so  many  serious  juxtapositions ;  our  relations  with  the  whole  outer 
world,  civilized  and  uncivilized,  have  become  so  numerous,  far  reach- 
ing, intricate,  close,  and  delicate,  that  we  have  practically  entered 
upon  the  condition  of  an  old  world  sovereignty,  with  its  industrial, 
social,  and  political  complications,  but  with  scarcely  any  of  the  tram- 
mels imposed  upon  it  by  traditions  and  alliances.  In  a  word,  the  new- 
est of  the  great  powers  has,  in  many  ways,  and  with  a  peculiar  signifi- 
cance, taken  on  the  aspects,  appropriated  to  itself  the  functions,  and, 
in  large  measure,  adopted  the  policies,  of  the  oldest,  and  is  now,  as  the 
result  of  both  its  growth  and  its  ambition,  called  upon  to  meet  the 
problems  it  has  either  created  or  solicited,  though  not  yet  fully 
realizing  the  import  of  some  of  them,  nor  being  willing  to  admit 
that  all  of  them  will  presently  have  to  be  solved. 

And  here  it  is  appropriate  to  remind  all  those  who  may  peruse  this 
volume  that  in  future  our  leaders  of  both  thought  and  action, 
financiers  among  the  rest,  and  in  many  respects  especially  they, 
must  greatly  broaden  the  range  of  their  vision,  and  more  diligently 
study  both  general  and  local  conditions,  not  as  things  capable  of 
being  wisely  considered  apart,  but  as  things  not  less  essentially 
united  in  practice  than  they  are  allied  in  principle.  Finance  should, 
indeed,  be  regarded  not  merely  as  a  business,  but  also  as  a  profes- 
sion. In  many  of  its  phases  it  is  as  much  entitled  to  respect  as  is 
statesmanship,  and  in  some  of  them  it  plays  quite  as  serious  and 
important  a  part.  In  the  world  of  affairs  it  constitutes  the  highest 
possible  sphere  of  finished  operation,  and  in  the  movements  of  com- 
mon life  it  is  the  motive  force  upon  which  depends  the  whole  machin- 


xxu 


PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 


ery  of  productive  and  distributive  activities.  It  is  entitled  to  be  phil- 
osophically considered  at  the  same  time  that  it  is  practically  applied, 
and  it  should  be  regarded  by  every  class  of  workers  and  observers 
as  offering  a  career  worthy  of  the  best  talent  and  entitled  to  the 
most  distinguished  honors;  indeed,  it  cannot  be  otherwise  regarded 
in  any  community  without  a  suggestion  that  there  is  much  ignorance 
to  be  combated  and  much  prejudice  to  be  overcome.  The  progress 
we  have  made  in  the  practical  uses  of  it  as  one  of  the  factors  of 
ordinary  material  advancement,  has  indeed  been  considerable;  but 
that  which  we  have  achieved  in  the  scientific  development  of  it  as  a 
potent  means  to  the  uttermost  possible  diffusion  of  the  blessings  of 
a  highly  organized  civilization,  has  certainly  not  responded  to  the 
desire  and  the  hope  of  those  most  loyally  and  intelligently  interested 
in  our  welfare.  As  a  matter  of  fact,  we  are,  in  respect  to  many 
things  which  concern  both  its  theoretical  scope  and  its  utilitarian 
functions,  far  behind  at  least  several  of  the  nations  of  the  older 
world  whose  ideas  we  are  prone  to  regard  as  antiquated,  and  whose 
ways  we  criticize  as  arbitrary,  cumbrous,  petty,  and  narrow.  To 
go  fully  into  details  with  a  view  to  prove  the  truth  of  this  contention 
and  to  turn  that  truth  to  the  best  account,  would  speedily  betray  us 
into  writing  a  volume  more  ample  in  size  than  that  to  which  our 
present  remarks  are  designed  as  an  introduction;  but  it  is  easy  to 
signalize  a  few  things  of  special  importance  and  of  large  present 
interest  that  are  striking  enough  to  suggest  at  least  the  fairness  of 
our  statement  and  to  excite  a  disposition  in  favor  of  earnest  and 
unprejudiced  investigation.  This  done,  we  may  safely,  and  with 
confidence  in  the  results  we  are  anxious  to  secure,  commit  to  the 
study  of  open  minds  the  various  discourses  and  papers  here  gath- 
ered together,  in  so  many  of  which  can  be  found  useful  hints  as  to 
our  shortcomings,  encouragement  as  to  our  well  conceived  purposes, 
and  enlightenment  as  to  the  principles  and  methods  to  be  compre- 
hended and  employed  in  our  procedure  in  order  that  we  may  master 
the  possibilities  of  our  situation  and  may  assure  to  ourselves  the 
advantages  with  which  our  future  is  pregnant  in  so  generous  a 
degree. 

In  the  first  place,  our  system  of  currency  and  credit,  which  is 
necessarily  at  the  bottom  of  all  business  movements,  and  which 
should  be  automatically  responsive  to  every  condition  of  trade,  and 


INTRODUCTION  xxiii 

equal  to  every  industrial  and  commercial  emergency,  however  created, 
is   admittedly    inelastic,   satisfactory   as   some   of    its   features    un- 
doubtedly are,  and,  as  experience  unceasingly  proves,  is  sometimes 
lethargical,  sometimes  provocative  of  strain,  and  sometimes  an  in- 
vitation to  rash  speculation  or  unscrupulous  manipulation.     It  lacks 
delicate  adjustment,  the  percolating  quality  essential  to  a  constantly 
maintained  equilibrium,  and  especially  the  faculty  of  rendering  as 
efficient  service  to  small  as  to  large  transactions,  to  isolated  as  to 
closely  connected  fields  of  operation,  to  minutely  subdivided  as  to 
highly  concentrated  capital.     This  condition  is  not  due  to  any  want, 
on  our  part,  of  either  ability  or  resourcefulness ;  but  to  the  absence 
of  scientific  co-ordination,  so  natural  and  so  usual  in  countries  rela- 
tively new,  and  to  a  certain  vanity  and  a  somewhat  reckless  spirit 
of   independence   inducing   us   to   eschew   imitation   and    to    crave 
initiative.     Models  in  accordance  with  which  we  might  work  for 
our  betterment  are  so   far  from  lacking  that  they  may  almost  be 
said  to  abound ;  and  they  are  so  completely  beyond  the  charge  of 
empiricism  that  their  rational  and  sustained  success  has  become  well 
nigh  proverbial.     We  have  only  to  look  across  our  border  to  the 
north  to  find  much  to  which  we  might  conform  with  unqualified 
advantage.     Our  Canadian  neighbors,  with  less  resources  and  less 
experience  than  ourselves,  but,  we  may  fairly  claim,  with  no  more 
aptitude    for   intelligent   enterprise,   though    certainly   with   greater 
reverence  for  authority  and  more  native  respect  for  wise  precedent, 
have  largely  escaped,  by  adherence  to  well  devised  methods,  many 
of  the  difficulties  with  which  we  have  to  contend  and  many  of  the 
risks  we  have  to  encounter.     They  are  free  from  the  menace  that 
lies  in  the  interference  of  the  government  with  banking;  they  have 
not  to  encounter  the  danger  to  metallic  reserves   inherent  in  the 
large  amount  of  our  outstanding  treasury  notes ;  they  are  able,  by 
their  system  of  branch  banks,  their  treatment  of  the  circulating 
notes  of  their  financial  institutions,  their  habit  of  unlimited  redis- 
count and  other  safe  and  tried  means,  to  make  their  currency  and 
their  commercial  credits  well   nigh   as  fluid  as  the  waters  of  the 
ocean,  and  well  nigh  as  obedient  as  they  to  the  varying  conditions 
which  demand,  now  here  now  there,  a  change  in  channel  or  in  vol- 
ume.    But  if  we  please  to  look  farther,  and  take  lessons  from  the 
practice  of  the  transatlantic  world,  which  if  it  be  less  exuberant  than 


xxiv  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

ourselves,  is  as  far  as  we  from  being  effete,  we  shall  find  awaiting 
our  study  and  soliciting  our  imitation  an  array  of  ideas  and  a  dis- 
play of  plans  and  methods  which  we  cannot  too  respectfully  con- 
sider or  too  diligently  compare  with  our  own  notions  and  usages. 

We  dare  not,  without  trenching  on  ground  assigned  to  others, 
and  to  which  it  is  our  function  simply  to  direct  attention,  undertake 
to  discuss  the  subject  of  vast  importance  we  here  present  in  passing; 
but  we  crave  for  it  special  thought,  since  it  constitutes  for  us  a 
practical  issue,  and  is  at  this  very  moment  clamoring  for  a  wise 
solution. 

As  to  the  diffusion  of  trading  facilities  and  advantages  designed 
to  place  the  smallest  dealer,  in  respect  to  his  limited  wants  and 
within  the  scope  of  his  restricted  operations,  on  a  parity  with  the 
strongest  and  richest  merchant;  as  to  the  opportunities  offered  to 
the  mass  of  the  people  for  the  direct  and  safe  investment  of  very 
small  sums  in  the  best  of  securities,  and  their  instant  and  easy  with- 
drawal, freed  from  the  burdens  of  intermediary  profits  and  the  risk 
of  speculative  mismanagement;  as  to  the  means  placed  at  the  com- 
mand of  borrowers  on  mortgage  to  secure  cheaply  and  to  pay  at 
leisure  by  amortization,  and  therefore  at  the  minimum  of  charge, 
the  moneys  they  may  require,  whether  in  trifling  or  in  great  amount ; 
as  to  the  government  of  corporations  and  of  those  huge  aggrega- 
tions of  capital  and  vast  combinations  of  effort  which  we  call 
"trusts" ;  as  to  the  whole  field  of  international  banking  and  the  much 
needed  unification  of  standards  and  methods  in  international  trade; 
as  to  the  happy  solution  of  the  great  industrial  and  social  question 
which  is  pressing  heavily  upon  the  very  life  of  all  modern  peoples ; 
and  as  to  other  things  of  grave  moment  and  present  concern,  we 
have  enough  to  learn  from  our  European  compeers  to  make  us  per- 
sistent and  grateful  students  for  a  generation  to  come. 

We  may,  let  us  repeat,  with  eminent  justice  boast  of  the  more 
than  substantial  progress  we  have  achieved ;  but  we  cannot,  strong 
though  we  are  in  the  vigor  and  earnestness  of  our  splendid  youth, 
afford  to  ignore,  much  less  to  despise,  the  wisdom  of  the  ages. 
Were  it  not  that  we  are  inundated  by  the  riches  of  a  virgin  and  most 
fruitful  land,  which  is  perpetually  yearning  for  an  increase  of  its 
inhabitants  and  perpetually  offering  to  all  mankind  the  allurements 
of  an  exhaustless  bounty ;  and  were  it  not  that  the  admirable  nature 


INTRODUCTION 


XXV 


of  our  institutions  and  the  abounding  chances  of  advancement  re- 
sulting from  the  industrious  exploitation  of  our  measureless  re- 
sources unite  to  inspire  ambition,  to  encourage  hope,  and  to  promise 
speedy  and  ample  reward,  we  should  to-day  be  in  the  throes  of  many 
a  problem  fraught  with  not  only  grave  anxieties  but  also  with  serious 
peril.  As  a  matter  of  fact,  we  are,  in  respect  to  several  very  dis- 
quieting questions,  already  on  the  verge  of  such  a  state;  and  we 
should  fortify  ourselves  for  the  oncoming  struggle  by  promptly  tak- 
ing all  the  precautions  which  our  own  experience  or  that  of  others 
may  suggest  as  serviceable  and  sustaining.  We  wish,  and  assuredly 
with  all  heartiness,  to  avoid  the  errors  and  misdeeds  of  the  older 
world,  and  happily  we  are  in  a  position  to  do  so  without  extraordin- 
ary effort ;  but  at  the  same  time  we  certainly  desire  to  profit  by  its 
trials,  to  gather  fruit  from  its  labors,  to  make  ourselves  heirs  to  its 
wonderful  experience,  and  to  share  its  numberless  victories  in  both 
the  material  and  the  moral  order. 

Already  hundreds  of  thousands  of  our  people,  notwithstanding 
the  plenitude  of  our  national  blessings,  are  engaged  in  a  fierce 
struggle  for  existence,  contending  at  one  time  with  the  tyranny  of 
selfish  organization,  and  at  another  with  the  cruelly  alternating  con- 
ditions of  abundance  and  scarcity  of  work,  or  of  prosperity  and 
stringency  in  business.  And  here  it  becomes  the  duty  of  our  cap- 
tains of  finance  to  devise  plans  for  the  more  thorough  equalization 
of  life's  earnings,  the  broader  and  more  constant  diffusion  of  op- 
portunity, and  the  more  thorough  utilization  of  individual  ability. 
But,  in  doing  this,  it  is  just  as  important  to  profit  by  the  force  that 
exists  within  us  as  to  take  advantage  of  that  which  is  extraneous; 
and  we  would  plead,  with  all  the  earnestness  of  which  we  are  capable, 
for  a  closer  and  more  disinterested  union  among  those  who,  in  the 
order  of  Providence,  have  been  charged  with  the  task  of  shaping  the 
material  destinies  of  our  people,  and,  in  doing  that,  of  promoting, 
though  by  indirect  means,  their  intellectual  enjoyment  and  their 
moral  happiness. 

Fortunately  the  association  of  our  bankers  in  the  national  society 
and  the  local  reunions  which  for  some  years  have  drawn  them  more 
and  more  closely  together,  and  that  excellent  affiliation  of  the  work- 
ing force  of  our  moneyed  establishments  known  as  the  American  In- 
stitute of  Bank  Clerks,  have,  in  both  the  higher  and  the  lower  ranks 


xxvi    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

of  the  financial  world,  done  an  exceeding  amount  of  good  by  the 
dissemination  of  sound  ideas,  the  suggestion  of  useful  reforms,  the 
encouragement  of  systematic  effort,  and  the  spread  of  profitable 
knowledge ;  but  it  is  in  the  carefully  concerted  and  loyally  supported 
plans  of  the  master  minds  of  our  business  hierarchy  that  we  must 
seek  to  find  the  best  assurance  of  that  solidarity  of  purpose  and 
that  uniformity  of  wise  and  good  example  to  which  we  must  look  for 
the  perfecting  of  our  commercial  life  and  the  realization  of  our 
destiny  as  one  of  the  greatest  and  most  beneficently  productive  com- 
munities of  the  present  and  of  all  other  times. 

Let  us  hope  that  the  volume  we  here  offer  to  the  consideration 
of  the  earnest  and  patriotic  workers  of  the  day  may,  in  some  small 
measure,  stimulate  minds  to  a  wholesome  activity  and  encourage 
aspiration  to  take  the  trend  of  the  higher  commercial  life,  so  closely 
allied,  in  an  era  like  this,  with  the  higher  life  of  every  kind. 

Charles  Francis  Phillips. 

New  York,  3rd  September,  1906 


PART  I. 
GENERAL  BANKING  SECTION 


BUSINESS  EDUCATION  AND  COMMERCIAL  AND  BANK- 
ING METHODS 

ADDRESS    DELIVERED   BY    HENRY    CLEWS,   OF    NEW    YORK    CITY,   BEFORE   THE    MINNE- 
SOTA  BANKERS'    ASSOCIATION,    AT  LAKE   MINNETONKA   IN  JUNE,   IOO5. 

I  need  hardly  say  that  the  bankers  of  this  country  are  deeply 
interested  in  the  choice  of  methods  for  directing  and  developing 
our  productive  energies,  and  in  the  development  of  the  mechanism 
by  which  our  business  is  controlled.  On  the  other  hand,  the  bro- 
kers of  the  community  who  deal  in  stocks,  bonds,  commodities,  and 
other  property  are  earnestly  interested  in  having  monetary  values 
kept  sound.  They  are  primarily  desirous  to  see  investors  protected 
from  the  irregularities  and  fluctuations  produced  by  the  misuse  of 
credit  or  misrepresentation. 

It  is  often  supposed  by  thoughtless  persons  that  some  natural 
opposition  exists  between  bankers  and  the  investing  public.  Some 
go  farther  and  assume  the  existence  of  such  an  opposition  between 
the  consuming  class  and  the  bankers  of  the  country.  No  errors 
have  been  more  mischievous  in  our  economic  and  political  life  than 
these.  What  hurts  the  financial  interests  of  the  country  injures  its 
great  public.  The  greatest  error  of  all  is  the  belief  in  an  opposition 
of  interest  between  "Wall  Street"  and  the  bankers  of  the  nation. 
Their  interests  are  identical,  and  commercial  soundness  is  equally 
the  foundation  of  both. 

The  problem  from  this  common  standpoint  is  the  method  to  be 
employed  in  the  proper  extension  of  credit  and  the  development  of 
appropriate  machinery  for  its  use.  Commercial  conditions  in  the 
1  'nited  States  are  anomalous  in  many  ways.  We  have  produced 
a  marvelous  industrial  and  technical  equipment  for  the  production 
of  raw  material  and  the  manufacture  of  goods.  We  have  developed 
a  system  of  transportation  which  has  no  equal,  and  elaborate  and 
efficient  machinery  for  exchanging  commodities  and  values  has  been 
built  up.  Practically  the  whole  of  our  industrial  and  economic 
mechanism  has  been  reconstructed  within  the  past  few  years. 

3 


4    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

In  this  great  process  of  development  and  growth,  it  is  not  strange 
that  some  departments  of  business  have  lagged  behind  others  and 
of  these  unsatisfactory  elements  the  most  conspicuous  is  that  of 
organization  and  management.  Our  business  men  have  considered 
that  a  properly  minute  and  careful  attention  to  the  details  of  ad- 
ministration and  operation  was  sufficient.  They  have  too  often 
neglected  to  follow  and  profit  by  the  obvious  changes  in  organiza- 
tion, which,  if  adopted,  would  save  them  much  personal  effort  and — 
more  important  still — keep  them  from  actual  ignorance  of  the  con- 
dition in  some  respects  of  their  own  enterprises.  But,  of  many  im- 
provements that  might  well  be  introduced  into  our  commercial 
practice,  the  one  of  primary  significance  is  the  adoption  of  intelli- 
gent methods  of  accounting  and  auditing  by  all  corporations  or 
associations  of  persons  which  employ  a  considerable  capital.  The 
time  has  certainly  arrived  when  the  old  and  familiar  systems  of 
''bookkeeping"  will  no  longer  fittingly  and  advantageously  answer 
for  the  conduct  of  modern  financial  business.  It  is  now  impossible 
for  the  manager  of  any  large  business  to  oversee  in  person  its  vari- 
ous operations  and  details.  Results  must  be  reduced  to  a  scientific 
basis ;  they  must  be  classified  with  the  same  minute  care  that  a 
scientist  would  devote  to  the  arrangement  of  a  series  of  plants  be- 
longing to  a  new  family  or  genus.  This  need  for  reform  and  for 
scientific  method  is  not  confined  to  any  one  group  of  institutions 
or  any  particular  species  of  business  enterprise.  It  is  a  general,  if 
not  universal,  need,  resulting  from  the  great  growth  of  our  activities, 
both  in  their  scope  and  in  the  amount  of  capital  they  involve.  Nor 
is  it  confined  to  private  enterprise.  It  extends  also  to  municipal 
governments  which,  influenced  in  part  by  the  work  on  accounting 
which  is  being  done  by  the  Census  Office,  are  casting  about  for 
ways  by  which  they  may  reorganize  their  business  and  statistical 
methods. 

It  will  not,  however,  be  sufficient  for  our  business  men  merely 
to  revise  their  methods  along  the  lines  indicated.  There  must  be 
added  a  system  of  publicity  of  accounts  which  shall  convey  to  the 
investor,  in  a  sincere  and  unmistakable  way,  every  business  detail 
that  he  has  any  right  to  know. 

I  do  not  mean  by  this  that  the  legitimate  secrets  of  incorporated 
companies  should  be  thrown  open  to  the  searching  eyes  of  business 


GENERAL  BANKING  SECTION  5 

enemies,   or  competitors.     In  introducing  a  proper  system   of  ac- 
counting and  auditing,  there  should  be  full  recognition  of  the  distinc- 
tion between  what  Mr.  James  B.  Dill  calls  "private  publicity"  and 
"public  publicity" — publicity  for  the  investor,  the  man  directly  con- 
cerned in  the  business  which  employs  his  funds,  and  publicity  for 
the  prospective  investor,  the  legislator,  and  the  press.     Our  legisla- 
tors  would   do   well   to   overcome   the  defect   in   corporation   laws 
from  which,  in  many  states,  injury  still  results — that  of  failing  to 
recognize  the  distinction  between   companies   which  are  public   in 
their  nature  and  methods,  and  those  which  are  private.     Nothing 
can  be  clearer  than  that  a  company  which  looks  to  the  general  in- 
vesting community  for  resources  should  give  to  that  public  state- 
ments so  clear  and  precise  that  its  financial  standing  and  the  char- 
acter of  its  management  can  be  properly  estimated.     On  the  other 
hand,  the  time  must  soon  come  when  stockholders  owning  consider- 
able portions   of   the  capital  of  incorporated   companies,   whether 
public  or  private,  will  have  the  right  to  demand  minute  investiga- 
tions and  reports  upon  their  operations  and  assets.     Such  reports 
can  be  intelligently  made  only  where  proper  methods  of  accounting 
are  employed,  and  where  the  inspection  is  made  by  a  man  of  special 
training  for  the  work.     So  far  as  relates  to  public  companies  and 
their  accounts,  it  would  be  better  that  the  information  should  be 
voluntarily  furnished  to  the  public  than  that  it  should  be  exacted 
under  forms  of  law,  and  perhaps  under  conditions  that  might  be, 
not    merely   distasteful,    but   positively   injurious,    to    the    concerns 
affected. 

There  has  of  late  been  a  remarkable  growth  in  the  intensity  of 
prejudice  and  opposition  displayed  toward  large  corporate  under- 
takings, or  trusts.  Much  of  this  has  been  intelligent,  while  some 
has  been  malevolent  and  imbued  with  class  prejudice,  and  often 
ignorance  has  been  the  foundation  of  opinion.  The  growth  of  a 
habit  of  furnishing  such  accounts  will  have  a  twofold  effect.  It  will 
furnish  a  fund  of  information  that  will  go  far  to  dispel  this  igno- 
rance and  prejudice ;  and  it  will  meet  a  growing  public  demand  half- 
way. By  conceding  fully  and  frankly  all  that  the  public  has  any 
right  to  ask,  the  unfair  criticism,  which  is  now  encouraging  hostile 
forces,  will  be  divested  of  its  menace  to  private  enterprise. 

It  is  often  urged  against  such  a  policy  that  it  would  foster  com- 


6    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

petition  and  invite  hostile  legislation  or  unreasonable  taxation.     But 
these  are  precisely  the  results  that  it  would  be  likely  to  avert.     The 
drift  of  the  times  is  wholly  toward  large  combinations,  and  nothing 
is  so  strong  a  deterrent  to  companies  or  persons  proposing  to  enter 
a  given  field  as  the  knowledge  of  the  difficulties  which  any  particular 
business  has  encountered,  and  the  greatness  of  the  volume  of  trans- 
actions required  to  produce  satisfactory  profits,  as  well  as  to  insure 
the  economy  necessary  in  order  to  show  any  gains  whatever.     Such 
fair  and  open  statements,  too,  will  form  the  most  reliable  safeguard 
against  municipal  ownership.     All  this,  of  course,  presupposes,  on 
the   part  of  corporations,  honest  returns  and  a   wide  and  public- 
spirited  policy  upon  which  they  can  afford  to  go  before  the  world. 
The  successful  carrying-out  of  these  ideas  will  imply  the  co-oper- 
ation of  skilful  public  accountants  and  auditors,  equipped  with  that 
thorough  knowledge  of  economic  principles  which  will  enable  them 
to   formulate  systems  of  classification,  and   show   not   merely  the 
financial  condition  of  a  given  business,  at  a  stated  time,  but  the 
commercial  facts  upon  which  its  affairs  rest  and  on  which  its  future 
prospects  of  success  must  depend.     Such  a  body  of  experts  is  al- 
ready in  existence,  though  the  number  of  competent  men  is  perhaps 
small,  and  far  from  being  well  distributed  throughout  the  country. 
The  men  available  are,  however,   increasing  in  number,  and  their 
profession   is   gaining   in   respect   and   consideration.     We   have    a 
number  of  chartered  accountants  of   Scotland  and  England   who 
have  served   the  minimum  apprenticeship   of  five  years,   and  have 
passed   the  rigid  examinations   in  general   accounting,    commercial 
and  bankruptcy  law,  and  actuarial  science  which  are  required  before 
their  diplomas  of  C.A.  are  accorded  to   them.     In   at  least   four 
states  we  have  now  distinct  legal  recognition  of  the  accountant  as  a 
professional  man,  the  standard  being  set  by  the  state  of  New  York 
in  its  Public  Accountants  Act,  which  grants  the  title  C.P.A.  to  all 
such  as  pass  a  specified  examination.     This  example  should  be  fol- 
lowed by  other  states.     It  would  be  well  if  these  laws  required  the 
serving  of  a  five  years'  apprenticeship  before  applicants  could  grad- 
uate. 

In  banking  we  find  no  exception  to  the  general  backwardness 
of  method  of  which  I  have  been  speaking;  and  as  our  bankers  are 
the  leaders  in  commercial  thought,  other  members  of  the  business 


GENERAL  BANKING  SECTION  7 

community  can  hardly  be  expected  to  be  more  progressive.  Says 
ex-Secretary  Gage:  "It  is  a  strange  anomaly  that,  while  in  nearly 
every  other  department  of  life  improvement  is  the  indispensable 
rule,  in  the  field  of  banking,  finance  and,  exchange  we  go  on  with 
an  indifferent  regard  to  the  handicap  imposed  by  defective  methods." 
These  words,  though  uttered  some  time  ago,  have  been  given  un- 
expected and  special  significance  by  recent  unfortunate  happenings, 
on  which  I  need  not  dwell,  but  which  indicate  the  need  of  radical 
changes  in  bank  examinations,  as  well  as  in  the  relations  of  our 
banks  with  their  customers  and  correspondents. 

It  should  be  remembered  that  defective  methods  are  more 
dangerous  to  the  community  in  banking  than  in  any  other  form  of 
business.  Individuals  and  corporations,  needing  to  borrow  money, 
present  to  the  banks,  when  required,  evidence  of  assets,  and  ask 
them  to  recognize  the  worth  of  these  by  granting  credit  thereon. 
If  the  banks  accommodate  their  customers,  they  practically 
guarantee  the  value  of  their  assets,  or  the  collaterals  offered ;  and,  in 
case  they  err,  their  capital  must  pay  the  forfeit  to  the  extent  of  their 
mistake  of  judgment.  But  unreasonable  pessimism  at  a  critical 
moment  may  lead  to  an  undue  contraction  of  credit,  involving  fail- 
ures and  panic,  just  as  too  confident  optimism  may  produce  un- 
founded inflation  and  excessive  speculation. 

While  there  is  this  hazard  of  error  in  either  direction,  and  the 
greatest  good  to  the  community  can  be  realized  only  by  correct 
judgment,  the  danger  of  accepting  weak  security  is  greater  than 
that  of  rejecting  sound  foundations  for  extensions  of  credit.  The 
Indianapolis  Monetary  Commission,  writing  in  1897,  from  an 
analysis  of  the  Comptroller's  figures  found  that  of  328  bank  failures 
reported  during  a  period  of  years,  139  were  connected  with  in- 
judicious banking,  or  depreciation  of  securities  generally  due  to  bad 
management. 

Though  it  is  true  that  a  lack  of  wise  judgment  in  business  can 
never  be  guarded  against,  it  is  evident  that  the  percentage  of  error 
may  be  greatly  reduced  by  proper  methods  of  gaining  information 
concerning  the  facts  upon  which  judgment  must  be  based.  A  de- 
fective system  for  obtaining  such  information  must  be  held  to  be 
primarily  responsible  for  the  errors  of  judgment  committed  by 
bankers,  who  are  as  competent  a  body  of  business  men  as  can  be 


8    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

found  in  the  world.  The  question  of  sound  credit  is  thus  exhibited 
as  the  problem  of  finding  ways  and  means  to  reduce  the  granting  of 
credit  to  a  science. 

It  is  evident  that  in  the  performance  of  this  most  important  func- 
tion the  banker  is  entitled  to  all  the  aid  that  he  can  secure.  And 
it  must  be  added  that  there  has  been  steady  progress  in  the  means 
adopted  for  assuring  the  character  of  this  basis  for  credit.  It  was 
perhaps  the  most  perfect  system  of  granting  credit  when  the  local 
banker,  like  David  Harum,  knew  every  borrower  in  his  own  com- 
munity and  could  make  proper  allowances  for  personal  untrust- 
worthiness,  or  give  personal  integrity  and  initiative  their  due  weight 
as  security  for  the  payment  of  loans. 

Unfortunately,  the  direct  personal  touch  is  lost  as  commercial 
communities  grow  larger  and  commercial  life  becomes  more  com- 
plex. The  old  methods  grow  antiquated,  like  the  stage-coach  and 
the  wooden  sailing-vessel  in  the  face  of  modern  ideas  of  transpor- 
tation. In  order  to  take  their  place,  an  ingenious  mechanism  has 
been  developed  in  our  best  institutions.  The  older  and  more  famil- 
iar method  of  lending  upon  general  knowledge  of  the  strength  of 
the  names  presented,  and  upon  information  as  to  the  main  circum- 
stances of  the  business,  gathered  in  some  more  or  less  casual  way, 
has  been  discarded.  In  its  place  there  is  now  being  generally  sub- 
stituted throughout  the  country  the  practice  of  requiring  borrowers 
to  make  full  statements  of  their  business  before  granting  them  any 
accommodation,  and  a  complex  and  highly  developed  system  of  re- 
cording and  classifying  information  concerning  borrowers  has  been 
evolved. 

The  man  who  would  get  credit  must  fill  out  forms  which  furnish, 
in  more  or  less  detail  according  to  the  circumstances,  the  data  which 
will  enable  the  bank  to  judge  of  his  business.  In  the  modern  finan- 
cial institution  the  "credit  department"  has  become  the  regulator  of 
the  whole  mechanism.  Some  consider  the  present  requirements  of 
full  statements  and  appraisement  unreasonable.  There  has  prob- 
ably never  been  a  change  or  forward  step  in  business  practice  that 
was  not  so  considered  by  some  of  the  persons  affected  by  it.  Yet 
no  change  in  our  banking  methods  can  be  more  conspicuously  justi- 
fied than  this.     It  has  long  been  in  vogue  in  foreign  countries  where 


GENERAL  BANKING  SECTION  9 

banking  is  more  nearly  a  profession  than  a  business.     Says  Pro- 
fessor Albert  S.  Bolles: 

A  borrower  wishes  a  bank  to  put  its  funds  for  a  time  completely  beyond 
iis  reach;  surely  he  ought  not  to  expect  that  this  will  be  done,  unless  assured 
that  the  money  will  be  forthcoming  at  the  time  promised.  Ought  the  bank 
to  be  satisfied  with  his  promise  that  he  will  do  so?  We  all  know  what  a 
wide  and  impassable  gulf  there  often  is  between  intention  and  performance. 
The  applicant  may  be  perfectly  honest  and  have  the  best  intentions,  but  a 
true  disclosure  of  his  affairs  might  at  once  lead  the  bank  to  decline  his 
application. 

The  fact  that  many  of  our  business  men,  even  those  who  are 
leaders  of  thought  in  their  own  communities,  continue  to  employ 
antiquated  methods  in  the  conduct  of  their  business  and  still  depend 
upon  out-of-date  forms  of  statement,  entails  grave  danger  to  the 
credit  basis  of  the  community.  And  this  danger  is  the  greater  be- 
cause those  who  are  the  cause  of  it  have  no  intention  to  deceive. 
Some,  when  they  become  involved,  purposely  resort  to  misleading 
methods  of  statement,  or  even  wilfully  misrepresent  the  state  of 
their  affairs.  But  these  are  the  exceptions.  The  truth  is  that  this 
is  more  than  a  question  of  personal  honesty  and  honor.  It  involves 
the  commercial  soundness  of  the  community,  and  every  effort  should 
be  employed  to  ascertain  facts,  and  make  sure  that  the  statements 
submitted  by  applicants  for  credit  correctly  represent  the  state  of  the 
business  to  which  they  relate.  Our  practice  has,  in  this  regard,  been 
far  too  lax  ;  and  a  long  step  toward  sounder  conditions  would  be 
taken,  were  our  bank  managers  to  require  the  certification  of  the 
balance-sheets  of  borrowers  by  competent  public  accountants.  Such 
a  plan  is  followed  in  European  countries  with  most  satisfactory  re- 
sults. 

The  banking  community  can  do  much  toward  the  introduction 
of  sounder  methods  of  accounting  and  better  business  practice. 
The  requirements  that  the  banker  makes,  the  principles  that  he  lays 
down,  will  be  accepted  by  those  who  look  to  him  for  light  and  lead- 
ing But  there  is  another  factor  in  the  movement  that  must  be  con- 
sidered of  controlling  importance.  This  is  the  proper  education  of 
those  who  are  to  become  our  business  men.  I  do  not  in  the  least 
deprecate  the  services  and  splendid  initiative  of  those  who,  by  their 
own  unaided  abilities,  have  brought  this  country  to  its  present  com- 
manding stage  of  development.     They  have  laid  the  foundations  of 


IO   PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

our  commercial  prosperity  deep  and  strong.  I  do  them  no  injustice 
when  I  say  that,  in  the  new  career  of  world-commerce  upon  which 
we  as  a  nation  have  entered,  there  is  pressing  need  for  a  new  kind  of 
technical  instruction  in  commercial  subjects  which  shall  at  least 
equal,  and  if  possible  surpass,  that  which  is  afforded  to  young  men 
in  Europe  who  are  contemplating  a  commercial  career.  The  recent 
marvelous  advance  made  by  Germany  in  gaining  control  of  the 
markets  of  the  world  is  largely  due  to  the  minute  and  careful 
technical  instruction  afforded  to  her  people  by  a  thorough  system  of 
technical,  trade,  and  commercial  schools.  And  what  Germans  have 
done  bv  their  technical  and  industrial  training  they  are  beginning 
to  do  through  their  commercial  education.  Inquiries  made  by  the 
London  Chamber  of  Commerce  not  long  ago  showed  that  at  least  35 
per  cent  of  the  firms  interrogated  there  employed  foreigners,  prin- 
cipally Germans.  Many  gave  it  as  their  opinion  that  foreign  train- 
ing was  such  as  to  fit  its  recipients  so  fully  for  modern  commerce 
as  to  preclude  the  possibility  of  successful  competition  by  others. 

The  question  of  introducing  such  a  system  of  instruction  in  this 
country  has  been  much  discussed.  It  has  been  asked  whether  it  can 
properly  be  furnished  by  our  higher  institutions,  and  some  have 
doubts  whether  it  can  be  given  at  all.  That  existing  methods  in 
education  are  unsatisfactory,  and  that  a  new  kind  of  training  should 
be  substituted  for  them,  is  beyond  question. 

Granting  that  the  new  education  for  business  men  can  and  must 
be  given  in  place  of,  or  at  least  in  addition  to,  existing  curricula, 
the  question  still  remains :  By  what  group  of  institutions  should  such 
training  be  furnished?  Perhaps  this  question  can  best  be  answered 
by  briefly  stating  what  is  actually  being  done.  The  past  few  years 
have  witnessed  a  remarkable  increase  in  the  number  and  scope  of 
courses  in  economics,  finance,  and  kindred  subjects  that  are  being 
afforded  by  our  colleges,  and  there  are  now  few  colleges  of  im- 
portance in  which  such  instruction  is  not  afforded,  and  fewer  still 
where  it  is  not  recognized  as  indispensable.  Too  often  the  instruc- 
tion afforded  by  our  higher  institutions  has  been  abstract,  hair- 
splitting, devoid  of  relation  to  actual  life.  It  has  been  metaphysical 
rather  than  practical.  But  this  trouble  is  now  at  last  being  appre- 
hended, and  the  remedy  is  beginning  to  be  applied.  In  six  or  eight 
American  universities  earnest  efforts  are  making  to  offer  courses 


GENERAL  BANKING  SECTION  II 

that  shall  be  truly  representative  of  practical  business.  At  the 
School  of  Commerce,  Accounts,  and  Finance  of  the  New  York  Uni- 
versity, at  Dartmouth  College,  at  the  Wharton  School  of  Finance 
in  the  University  of  Pennsylvania,  and  at  the  Universities  of 
Chicago,  of  California,  of  Wisconsin,  and  elsewhere,  this  effort  is 
being  prosecuted  with  zeal  and  with  hopeful  chances  for  success. 

Practical  courses  in  banking,  accounting,  transportation,  cor- 
poration finance,  international  exchange,  industrial  processes,  and 
kindred  lines  of  study,  are  being  developed,  and  a  new  literature, 
practical  rather  than  theoretical,  is  appearing.  The  process  will  be 
a  long  one,  but  a  sound  foundation  is  being  laid.  How  real  a  start 
the  new  movement  is  getting  can  be  realized  from  the  fact  that,  dur- 
ing the  past  eighteen  months,  at  least  five  American  university 
presidents  have  attempted  to  bring  together  men  who  had  pursued 
a  business  specialty,  and  who  were  capable  of  giving  instruction  in 
it. 

The  accountants'  profession,  in  view  of  its  great  and  growing 
importance,  ought  indeed  to  be  definitely  and  formally  raised  to  a 
higher  level.  Every  university,  and  every  college,  should  have  an 
accountants'  school,  just  as  it  has  a  medical  school  or  a  law  depart- 
ment, and  give  diplomas  to  accountants  on  graduating,  as  it  would 
to  graduating  students  in  either  of  the  other  departments.  A  sepa- 
rate degree  for  accountants  would,  of  course,  have  to  be  credited ; 
and  this  degree  would  not  only  definitely  and  formally  elevate  their 
business  to  the  rank  of  a  profession,  but  command  public  con- 
fidence in  their  work,  so  that  their  certificates  of  the  results  of  ex- 
aminations of  accounts  would  be  accepted  as  reliable  and  conclusive 
by  the  public. 

While  something  has  been  done,  and  much  is  now  doing,  far 
more  still  remains  to  be  done ;  for  ultra-conservative  men  still  cling 
to  the  older  type  of  education.  The  task  of  popularizing  the  work, 
of  carrying  the  new  ideas  of  training  over  the  length  and  breadth 
of  the  land,  will  be  a  labor  of  many  years.  Its  complete  and  ulti- 
mate success  must  depend  upon  the  bankers  and  business  men  of  the 
country.  What  they  demand  and  what  they  support,  that  we  shall 
have  in  time,  and  not  until  our  technical  and  commercial  education 
is  raised  to  a  par  with  that  of  other  countries  shall  we  reach  a  sound 
and  safe  and  equal  basis  of  competition  with  them  in  that  respect. 


I2       PRACTICAL  l'RORLEMS  IN  BANKING  AND  CURRENCY 

In  proportion  as  well-trained  men  take  their  places  everywhere  in 
the  industrial  life  of  the  nation,  will  new  and  exact  methods  be 
everywhere  introduced  and  improved  upon,  and  the  foundations  of 
our  commerce  and  credit  be  strengthened. 

But,  without  reference  to  the  broader  effects  of  the  new  com- 
mercial education,  more  careful  scientific  accounting  and  auditing 
will  not  only  reduce  bank  failures  to  a  minimum,  but  lessen  the 
danger  of  loss  to  banking  institutions  from  erroneous  valuations  of 
the  security  offered  for  loans  and  unwise  discounts.  If  these  points 
be  conceded,  there  are  several  important  inferences  that  may  safely 
be  drawn  from  them.  Probably  the  most  important  of  these  infer- 
ences relates  to  the  basis  upon  which  our  bank-note  currency  now 
rests.  Given  a  continuance  of  present  conditions,  the  rapid  reduc- 
tion of  United  States  bonds  is  a  foregone  conclusion.  Already  their 
price  renders  note  issues  based  upon  their  deposit  with  the  Treasury 
of  little  or  no  profit  to  the  bank  which  puts  them  into  circulation. 
The  objection  to  existing  conditions  is  greatest  in  the  limitations 
placed  upon  the  reduction  of  circulation  which  seem  designed  for 
the  very  purpose  of  preventing  the  attainment  of  elasticity  in  our 
bank  currency.  The  national  banks  are  in  imperative  need  of  a  re- 
moval of  the  unreasonable  limitation  upon  withdrawals  of  bonds, 
and  of  the  introduction  of  such  other  minor  changes  as  will  tend  to 
render  the  national  banking  system  more  responsive  to  business 
needs. 

The  proposal  to  do  away  with  the  United  States  bond  security 
behind  our  national  bank  note  issues,  and  to  place  them  upon  the 
same  basis  as  the  Canadian  bank-bills,  has  often  been  mooted.  Two 
classes  of  reasons  are  commonly  assigned  for  our  failure  to  accept 
the  experience  of  other  nations  in  regard  to  the  conditions  of  issue  of 
bank-notes.  One  class  relates  to  the  difficulty  of  properly  super- 
vising the  banks  themselves,  and  assuring  their  honest  administration 
of  the  funds  committed  to  their  charge ;  the  other,  to  the  difficulty 
experienced  by  bank  officers  in  properly  judging  the  worth  of  the 
assets  upon  which  the  new  note  currency  would  rest.  All  these  con- 
siderations are  evidently  reducible  to  the  single  one  of  security. 
In  other  words,  let  proper  security  be  assured  and  there  is  nothing 
to  be  urged  against  the  abandonment,  at  least  in  part,  of  the  United 


GENERAL  BANKING  SECTION 


13 


States  bond  deposits  as  a  basis  for  circulation  and  the  introduction 
of  a  more  elastic  currency  system. 

The  banker  who  doubts  the  possibility  of  issuing  a  safe  cur- 
rency based  on  commercial  assets  never  questions  the  worth  of  his 
own  assets  and  of  those  possessed  by  institutions  conducted  upon 
similar  lines.  He  complains  of  the  danger  of  bad  loans,  of  fraud,  of 
unsound  banking,  on  the  part  of  other  institutions.  It  is  obvious 
that  all  banking  within  its  own  sphere,  whether  local,  national,  or 
international,  should  be  as  good  as  the  best.  If  examinations  are 
inadequate,  we  should  see  that  they  are  made  more  rigorous ;  if  doubt 
exists  as  to  the  value  of  a  borrower's  assets,  or  of  the  security 
offered,  we  should  clear  it  up  by  demanding  statements  as  to  the 
condition  of  the  borrower,  or  the  value  of  his  collaterals,  made  upon 
scientific  lines  and  guaranteed  by  expert  inspection  and  certification, 
or  refuse  accommodation.  This  is  the  plan  now  rapidly  coming 
into  vogue  among  large  New  York  institutions,  and  there  is  no  rea- 
son why  it  should  not  be  adopted  throughout  the  country. 

I  do  not  know  of  any  better  evidence  as  to  what  can  be  done  by 
the  application  of  expert  methods  in  insuring  the  soundness  of  assets 
than  that  offered  by  Hon.  James  H.  Eckels  in  a  recent  address  before 
the  University  of  Chicago  School  of  Commerce.     He  said : 

Since  I  have  been  at  the  Commercial  National  Bank  we  have  bought, 
in  four  years,  some  $70,000,000  of  commercial  paper,  and  of  that  we  had  only 
one  note  not  paid  at  maturity,  although  it  was  paid  later;  and  one  of  $10,000 
on  which  there  was  a  loss  of  $2,000. 

The  benefits  to  be  derived  from  an  elastic  currency  have  been 
so  often  and  so  well  set  forth  that  they  need  no  recapitulation  from 
me.     Why,  therefore,  should  we  quietly  put  up  with  existing  evils? 
Other  countries  are  enjoying  the  fruits  of  proper  currency  methods 
in  the  shape  of  low  interest  rates,  sound  credit  systems,  and  assured 
knowledge  of  business  conditions.     Yet  we  still  lock  up  in  unavail- 
able bonds  large  portions  of  our  banking  assets,  which,  so  far  as 
active  business  is  concerned,  might  as  well  be  underground.     With 
improved  business  practice,  with  proper  precaution  for  judging  col- 
lateral security,  and  credits,  and  above  all  with  a  community  <>f  you 
business  men  trained  in  the  best  methods  of  the  new  education, 
may   look    forward   to   a   conservative    forward    movement   toward 
sounder  credit,  more  solid  banking,  and  more  responsive  currency. 


l4   PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

Meanwhile,  with  regard  to  our  national  banking  system,  I 
suggest  one  very  important  preliminary  change  that  Congress  should 
authorize  without  delay,  and  that  is,  to  allow  the  national  banks  to 
deposit,  with  the  United  States  Treasury,  state  and  municipal  bonds 
approved  by  the  Comptroller  of  the  Currency,  as  well  as  bank  assets, 
to  secure  one-half  the  currency  they  may  issue.  This  would  induce 
them  to  take  out  more  notes  than  they  find  it  profitable  to  do  under 
the  present  law,  which  requires  all  their  circulation  to  be  secured 
by  United  States  bonds. 

These,  however,  are  so  high  in  price  that  they  yield  an  ex- 
tremely low  rate  of  interest,  and  there  is  little  inducement  to  buy 
them  even  by  the  small  country  banks,  which  bank  largely  on  their 
circulation,  whereas  the  large  city  banks  bank  on  their  deposits. 
Secretary  Shaw  has  already  taken  a  step  in  this  direction  by  accept- 
ing state  and  municipal  securities  to  secure  government  deposits 
when  we  have  had  a  stringent  money  market,  and  Congress  will,  I 
think,  be  willing  to  so  amend  the  National  Currency  Act  as  to  per- 
mit of  the  suggested  change.  The  effect  of  this  half-way  measure 
would  be  great  and  immediate ;  and  we  urgently  need  this  widening 
of  the  foundation  for  national  bank-note  issues,  in  view  both  of  the 
high  price  and  of  the  extreme  scarcity  in  the  open  market  of  United 
States  bonds,  and  the  constantly  growing  requirements  of  our 
rapidly  growing  population  for  currency. 

In  particular,  bank  assets  should  be  made  available  in  the  same 
way  as  United  States  or  other  bonds  for  circulation,  the  one  form  of 
security  being  practically  equal  to  the  other  when  both  are  good; 
and  of  course  they  would  not  receive  the  approval  of  the  Comp- 
troller of  the  Currency  unless  they  were.  Bank  officers  all  over  the 
country  should  use  their  influence  with  Congress  to  bring  about  this 
desirable  result. 

In  our  rapidly  progressive  age,  whatever  is  obsolete  or  unneces- 
sary, or  a  hindrance  to  development,  should  be  swept  away  like  cob- 
webs, and  whatever  is  most  direct,  time-saving,  and  conducive  to 
our  national  prosperity  and  legitimate  expansion,  within  the  limits 
of  safety  and  sound  banking,  should  be  adopted.  Old-fogyism 
should  not  be  allowed  to  stand  in  the  way  of  needed  reforms  or 
obstruct  the  march  of  progress,  either  in  banking  or  in  general  busi- 
ness, and  the  financial  and  commercial  policy  of  the  nation  should 


GENERAL  BANKING  SECTION  1 5 

aim  to  leave  banking,  domestic  trade,  and  manufactures,  and  foreign 
commerce,  as  much  as  possible,  untrammeled  by  needless  restraints. 
Among  minor  matters,  the  present  cumbersome  and  expensive 
customs  of  settling  foreign  exchange  balances  by  shipping  gold  from 
this  country  to  others,  and  vice  versa,  should  be  superseded  by  an 
international  gold  clearing-house.  The  details  of  this  could  be 
easily  arranged  by  means  of  a  gold  note  currency  issued  against 
gold  deposits,  and  a  mutual  agreement  between  the  large  banks  here 
and  those  in  Europe.  It  has  such  obvious  advantages  that  the 
sooner  this  international  clearing-house  method  is  adopted  the  bet- 
ter. It  will  save  not  only  the  freight  and  packing  and  insurance 
charges,  and  loss  of  interest  on  gold  in  transit,  but  the  heavy  loss 
by  abrasion  consequent  on  transportation.  It  will  save  time,  risk, 
and  uncertainty,  too,  by  making  cable  telegrams  take  the  place  of 
gold  shipments  in  the  transmission  of  credits.  By  taking  the  initia- 
tive in  this  and  the  other  matters  suggested,  we  shall  be  foremost  in 
the  march  of  improvement. 


HOW  FOREIGN  COMMERCE  BENEFITS  THE  AMERICAN 

BANKER 

ADDRESS  DELIVERED  BY  W.  L.  MOYER,  PRESIDENT  OF  THE  MECHANICS  AND  TRADERS 
BANK,  OF  NEW  YORK,  BEFORE  THE  MISSOURI  BANKERS'  ASSOCIATION  AT  ST. 
LOUIS,   MAY,    I903. 

It  is  safe  for  me  to  assume  that  there  is  scarcely  one  of  us  who 
has  not  frequently  during  his  banking  career  been  confronted  by  the 
problem  of  how  to  maintain  dividends  when  interest  rates  fall,  or 
when  competition  becomes  so  keen  as  to  prevent  the  profitable  use 
of  his  funds.  It  seems,  therefore,  fair  to  presume  that  any  policy, 
pursuance  of  which  may  with  safety  exercise  a  favorable  influence 
upon  the  profit  account  of  a  bank,  is  a  welcome  topic  for  considera- 
tion and  discussion.  Recent  circumstances  have  caused  me  to  de- 
vote time  and  thought  to  a  question  to  which  I  had  previously  given 
comparatively  little  attention,  viz.,  the  extension  of  our  banking 
system  to  other  countries. 

Before  taking  up  this  subject  "How  Foreign  Commerce  Benefits 


i6       PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

the  American  Banker,"  specifically,  it  is  proper  to  ask  a  question: 
"Upon  what  does  a  bank  depend  principally  for  its  prosperity? 
What  condition,  outside  of  the  bank  itself,  works  for  its  benefit?" 
Without  hesitation  one  may  reply  that  that  which  is  of  prime  im- 
portance is  energetic,  healthy  commercial  activity  in  the  community 
to  which  the  bank  looks  for  its  business.  The  truth  of  this  state- 
ment will  not,  I  think,  be  questioned;  granting  its  truth,  we  reach 
the  conclusion  that,  other  things  being  equal,  any  force  or  circum- 
stance that  tends  to  develop  and  expand  the  commercial  activity  of 
a  community  is  of  vast  benefit  to  its  banks.  In  view  of  these  facts 
and  with  our  experience  as  bankers,  let  us  try  to  see  what  can  be 
done  to  attain  the  best  results  for  our  banks  and  show  a  sustained 
profit  for  our  stockholders. 

In  its  early  days  a  community  is  the  center  of  a  sparsely  settled 
area,  where  the  people  are  engaged  in  agriculture,  stock  raising, 
lumbering  or  mining.  The  community  has  very  little  money,  and 
the  first  business  of  the  bank  is  limited  to  loaning  its  own  funds  at 
rates  which,  although  high,  are  those  which  the  borrowers  must  pay, 
having  no  other  recourse.  As  the  development  of  the  neighboring 
territory  progresses,  and  the  wealth  of  the  community  increases, 
the  bank  becomes  the  custodian  of  its  surplus  funds,  and  by  loaning 
them  at  fair  rates  realizes  good  profits  and  earns  large  dividends 
on  its  capital. 

With  the  increasing  wealth  of  the  community,  however,  banks 
increase  in  number,  individual  lenders  compete  with  the  banks,  and 
interest  rates  fall.  Furthermore,  the  production  of  the  community 
soon  reaches  its  own  consuming  power,  and  unless  there  be  an  outlet 
for  its  surplus  products,  business  stagnation  follows,  the  period 
being  one  when  the  needs  of  the  community  are  about  met  by  its 
own  production,  with  a  comparatively  small  demand  for  money. 
This  condition  is  disadvantageous  for  the  bank. 

Rut  new  enterprises  come  in,  new  railroads  enter  the  territory 
and  provide  outlets  for  its  surplus  products,  and  increased  business 
activity  follows.  While  the  increase  in  wealth  in  the  community 
through  the  sale  of  its  surplus  in  other  markets  offsets  the  demand 
for  money  with  which  to  cultivate  larger  areas,  and  so  prevents  any 
decided  rise  in  the  interest  rate,  the  growth  in  number  and  volume  of 
the  bank's  transactions,  resulting  from  the  new  commercial  activity 


GENERAL  BANKING  SECTION  17 

and  life  of  the  community,  brings  to  the  bank  another  period  of  profit. 

This  stage  in  the  history  of  a  community  and  its  bank  continues 
until  the  development  of  the  natural  resources  in  the  surrounding 
territory  has  reached  a  maximum.  Then  comes  a  second  period  of 
stagnation,  often  one  in  which,  because  of  the  quantity  of  idle  money 
in  the  district,  interest  rates  seek  a  lower  level  or  a  large  surplus  is 
carried  at  small  profit,  and  the  bank's  earnings  fall  in  proportion, 
making  it  difficult  to  maintain  the  dividend  rate. 

Then  comes  the  manufacturing  period,  and  with  it  the  employ- 
ment of  the  funds  of  the  community  in  new  enterprises.  Here  we 
pass  through  the  same  phases  as  before ;  both  community  and  bank 
repeat  the  experience  of  the  period  of  natural  products,  the  engage- 
ment of  the  funds  thus  employed  at  first  bringing  in  better  interest 
rates  for  the  bank.  When  the  manufactures  equal  the  demands  of 
the  community,  there  comes  another  time  of  business  depression. 
Then  the  increase  in  the  capacity  of  the  factories  and  the  shipments 
and  sale  of  their  wares  to  other  parts  of  the  country  cause  renewed 
activity  in  the  business  world,  a  corresponding  time  of  prosperity 
for  the  bank,  progressive  growth,  both  in  the  wealth  and  the  life  of 
the  community,  until  the  time  when  the  output  reaches  the  capacity 
for  consumption  of  the  country  itself.  When  that  limit  is  reached 
there  comes  again  in  the  life  of  the  community,  and  of  all  commun- 
ities similarly  situated  in  the  same  country,  a  time  when  business 
seems  to  be  at  a  standstill  and  banks  suffer  accordingly. 

Standing  at  this  point,  and  seeking  a  remedy  for  the  stagnation  of 
business,  we  must  be  governed  by  past  experience.  In  each  case 
you  will  see  that  the  period  of  depression  has  been  relieved  by  reach- 
ing out  for  broader  markets.  Thus,  and  thus  only,  may  the  surplus 
products  of  the  community  be  disposed  of  and  its  commercial  life 
be  made  broader  and  stronger.  Thus  it  appears  that  when  a  nation 
reaches  the  point  where  its  natural  and  artificial  products  outstrip 
the  nation's  needs,  the  further  growth  of  its  commerce,  upon  which 
the  prosperity  of  the  bank  largely  depends,  calls  upon  the  nation  to 
enter  the  field  of  foreign  commerce.  If  the  foreign  commerce  of 
the  country  be  then  encouraged  by  every  legitimate  means  at  hand, 
the  nation's  commercial  elements  will  respond  and  with  that  response 
will  come  an  increase  in  volume  of  the  banks'  transactions  and  cor- 
responding profits. 


18   PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

Leaving  for  later  consideration  the  various  ways  in  which  the 
banking  community  will  profit  by  the  development  of  foreign  com- 
merce, and  accepting  the  conclusions  reached,  let  us  review  the 
various  phases  through  which  communities  and  their  banks  have 
passed,  and  get  the  benefit  of  their  experiences. 

The  commercial  life  of  the  community  and  the  prosperity  of  the 
bank  go  hand  in  hand,  and  if  the  banker  would  benefit  himself,  he 
must  do  so  by  using  the  trust  that  the  public  has  reposed  in  him  for 
the  upbuilding  of  the  legitimate  commercial  life  of  that  community. 
Thus  we  see  that  in  order  properly  to  answer  the  question:  "How 
can  foreign  commerce  benefit  the  American  banker?"  we  must  also 
answer  the  question:  "What  can  the  American  banker  do  to  build 
up  and  extend  our  foreign  commerce?" 

The  extension  of  our  foreign  as  of  our  domestic  business  depends 
upon  the  confidence  of  the  commercial  community  in  the  banking 
facilities  available ;  i.e.,  in  the  ability  to  furnish  accurate  information 
about  the  standing  of  prospective  customers,  in  the  prompt  collec- 
tion of  proceeds  of  sales  made  in  distant  localities,  and  in  making 
advances  as  needed.  No  foreign  bank  can  handle  our  foreign  busi- 
ness satisfactorily  in  a  distant  land.  Our  banks,  through  foreign 
branches  or  agencies,  must  be  able  to  follow  our  foreign  trade 
through  all  its  wanderings  from  factory  to  market.  If  a  bank  do 
less  than  this,  it  will  satisfy  neither  its  customers  nor  its  stockhold- 
ers. Hence,  in  order  that  the  nation's  commercial  community  and 
the  banking  world  may  continue  to  reap  the  legitimate  fruits  of 
their  growth,  the  banking  system  of  the  country  must  be  extended 
beyond  the  country's  boundaries. 

These  facts  have  long  been  recognized  by  other  nations,  particu- 
larly by  England  and  Germany,  and  it  is  through  this  recognition 
that  they  have  been  able  to  develop  their  foreign  commerce,  the 
profits  from  which  have  added  enormous  sums  to  the  wealth  of  the 
home  countries.  With  no  experience  of  our  own  to  guide  us,  it  is 
but  prudent  to  understand  and  appropriate  that  of  the  pioneers  in 
the  field,  and  it  is  perhaps  fortunate  for  us  that  the  particular  sphere 
in  which  these  nations  have  displayed  great  activity  is  that  to  which 
the  logic  of  events  naturally  causes  us  to  turn  our  attention. 

The  Treasury  Bureau  of  Statistics,  in  analyzing  the  international 
commerce  of  the  principal  countries  of  the  world,  estimates  that  the 


GENERAL  BANKING  SECTION  19 

total  annual  value  of  the  manufactures  which  enter  into  this  com- 
merce amounts  to  four  billions  of  dollars,  of  which  sum  the  United 
States  furnishes  10  per  cent,  or  $400,000,000.  Of  this  enormous 
total  the  United  Kingdom  supplies  one  billion  dollars,  or  25  per 
cent. ;  Germany  supplies  20  per  cent. ;  France  about  12  per  cent. ; 
and  the  Netherlands  about  6  per  cent.  You  will  note  these  four 
nations  supply  almost  two-thirds  of  the  entire  amount  of  the  com- 
merce of  the  world. 

Strange  to  say,  the  nations  which  are  the  largest  exporters  of 
manufactures  are  also  the  largest  importers  of  manufactures ;  this 
being  due,  in  part,  to  the  fact  that  much  of  the  material  which  they 
use  in  manufacturing  is  produced  in  other  countries  and  imported 
in  the  first  stage  of  manufacture ;  while  other  manufactures  imported 
are  composed  of  articles  produced  in  other  parts  of  the  world  and 
not  produced  in  the  countries  in  question. 

In  the  case  of  Great  Britain,  for  example,  which  imports  seven 
hundred  and  twenty-five  millions  of  dollars  of  manufactures  annu- 
ally, nearly  thirty-six  millions  represents  the  value  of  copper,  chiefly 
imported  from  the  United  States  in  the  form  of  pigs  and  bars  in  the 
first  process  of  manufacture;  sixty-five  million  dollars  manufactures 
of  silk,  of  which  the  material  is  not  produced  in  Great  Britain ;  sixty- 
three  millions  of  dollars  of  wool,  a  large  part  of  which  is  imported 
in  the  first  stage  of  manufacture ;  sixty-seven  millions  of  dollars  of 
food  and  drinks,  chiefly  in  the  first  stage  of  manufacture;  and  more 
than  fifty  millions  of  dollars  of  leather,  which  after  importation  be- 
comes a  material  for  use  in  manufacturing. 

Exportation  of  manufactures  exceeds  importation  in  Great  Brit- 
ain, Germany,  France,  the  United  States,  Austria-Hungary,  Belgium, 
and  Switzerland,  while  in  all  other  countries  in  the  world  importa- 
tions of  manufactures  exceed  exportation.  Turning  to  the  import 
side  we  learn  that  manufactures  form  76  per  cent,  of  the  importa- 
tion into  Australia;  68  per  cent,  into  the  Argentines;  57  per  cent, 
into  Canada ;  53  per  cent,  into  Japan ;  38  per  cent,  into  the  United 
States ;  and  28  per  cent,  into  Great  Britain  and  Germany. 

The  important  field  now  open  to  us,  from  which  we  derive  com- 
paratively little  benefit,  is  the  Orient,  the  trade  of  which,  from  our 
relative  geographical  position,  no  less  than  from  our  superior  facili- 
ties for  handling  it,  properly  belongs  to  the  people  of  the  United 


20   PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

States.  Facing  the  Pacific  and  South  Pacific  Oceans  is  a  population 
of  seven  hundred  and  fifty  million  people,  whose  commerce  to-day 
represents  the  enormous  sum  of  more  than  two  billion  dollars  per 
annum.  Of  this  the  United  States  handles  less  than  10  per  cent,  or 
two  hundred  millions,  while  the  profits  resulting  from  the  remain- 
ing 90  per  cent,  go  to  European  banking  houses  and  merchants  in- 
stead of  to  our  own. 

England  and  Germany  have  pre-empted  the  Oriental  field  and 
gained  a  firm  hold  on  its  commerce  which  they  will  be  slow  to 
relinquish.  Encouraged  by  the  presence  there  of  powerful  repre- 
sentatives of  their  respective  nations,  by  the  influential  position  held 
by  their  banking  establishments,  and  by  the  ready  help  they  extend, 
natives  of  England  and  Germany  have  sought  these  distant  shores, 
have  lived  and  prospered  there,  and  have  greatly  extended  the  busi- 
ness of  their  adopted  countries  with  their  native  lands. 

To  cultivate  that  foreign  commerce,  and  to  give  us  an  equal 
chance  with  England,  Germany,  and  other  countries,  it  is  as  neces- 
sary that  we  should  follow  their  example  and  have  our  own  bank- 
ing institutions  in  those  markets  to  promote  and  facilitate  the  trade 
which  our  goods  create,  as  it  is  that  any  army  in  a  distant  land  should 
have  a  supply  department.  The  latter  furnishes  transportation, 
provisions,  forage,  etc.,  to  the  troops,  and  follows  the  army  in  all 
its  movements.  In  like  manner  the  bank  supplies  its  customers  en- 
gaged in  exporting  with  the  facilities  necessary  for  the  movement 
of  their  products  to  foreign  shores.  An  international  bank  drives 
home  the  wedge  of  a  country's  commerce  in  a  foreign  land.  Only 
when  a  bank  works  for  it  will  foreign  trade  expand.  It  is  a  familiar 
saying  that  "commerce  follows  the  flag,"  but  unless  that  flag  is  a 
bank  of  the  same  country  we  are  safe  in  saying  that  it  will  not  fol- 
low far. 

What  commerce  will  do  for  a  country  is  well  known  by  the 
growth  of  England.  With  an  area  scarcely  larger  than  the  state  of 
New  York,  England  through  her  foreign  commerce  has  become  the 
wealthiest  nation  in  the  world.  She  has  scarcely  a  bank  or  a  bank 
branch  which  is  not  directly  connected  with  one  or  another  of  the 
great  Anglo-Oriental  banks.  In  all  the  advertisements  of  these 
Oriental  banks  a  long  list  of  domestic  banks  is  given,  and  in  many 
other  ways  a  community  of  interest  is  established  which  results  in 


GENERAL  BANKING  SECTION  21 

bringing  the  Oriental  bank  and  the  home  bank,  and  (what  is  of  more 
importance)  the  customers  of  both,  into  very  close  and  sympathetic 
reciprocal  relations,  which  in  their  results  are  enormously  stimulat- 
ing to  international  commerce.  If  the  merchant  in  Sheffield,  Eng- 
land, wishes  to  open  a  market  for  his  goods  in  Hongkong,  he  obtains 
the  most  reliable  and  confidential  information  through  the  medium 
of  his  bank  and  its  associated  institution  in  Hongkong,  and  in  every 
way  conceivable  his  business  is  promoted.  The  services  which  the 
home  bank,  through  its  foreign  branches,  renders  to  the  home  pro- 
ducer are  far  superior  to  those  which  are  offered  by  agencies  in  this 
country. 

But  England's  hold  on  the  Orient,  although  not  to  be  easily 
lessened,  is  not,  so  far  as  we  of  this  country  are  concerned,  an  in- 
surmountable obstacle.  While,  by  reason  of  the  long-established 
relations  of  English  houses,  that  country's  Oriental  commerce  is 
now  in  the  lead,  it  must  be  borne  in  mind  that  the  early  completion 
of  our  cable  to  Manila  will  cut  in  half  the  present  cable  distance, 
and  thus  add  to  the  advantage  of  our  geographical  position,  that  of 
much  lower  cable  rates.  If  it  be  true  that  American  merchants  and 
manufacturers  are  entering  the  field  with  Great  Britain  and  Germany 
and  successfully  wresting  from  them  not  only  the  other  European 
markets  but  their  own  domestic  trade,  they  need  not  fear  competition 
in  distant  countries  where  their  rivals  are  working  at  a  far  longer 
range  than  they.  With  the  banks  of  this  country  joining  forces  and 
pursuing  the  policy  hitherto  so  successfully  followed  by  England, 
every  bank  in  the  country  has  the  means  of  being  of  very  great 
service  in  developing  the  business  of  its  clients  and  in  adding  to  its 
own  profits. 

This  development  of  foreign  commerce  will  benefit  the  American 
banker  in  more  ways  than  one.     It  will  do  so — 

First.  As  has  been  shown  above,  in  the  increased  and  sustained 
activity  of  the  commercial  life  of  the  community  which  he  serves. 

Second.  The  American  banker  who  is  engaged  in  this  kind  of 
business  will  be  benefited  by  having  his  assets  in  more  liquid  form. 
When  the  manufacturer  in  this  country  sells  his  products  in  our 
markets,  it  frequently  happens  that  he  requires  almosl  continual  as- 
sistance  from  his  banker,  owing  to  his  inability  to  realize  on  his 
sales  until  after  the  expiration  of  the  term  of  credit  which  usage  de- 


22       PRACTICAL  PROBLEMS  IN  RANKING  AND  CURRENCY 

mands  be  granted  to  his  customers.  A  large  percentage  of  the 
bank's  bills  receivable  are  thus  made  up  of  unsecured  commercial 
paper  upon  which,  in  time  of  stringency,  the  bank  could  not  realize 
quickly.  When,  however,  the  sales  of  the  manufacturer  are  to 
foreign  customers,  they  become  the  basis  for  bills  of  exchange,  which 
are  accompanied  by  bills  of  lading,  insurance  policies,  etc.,  covering 
the  shipment  of  the  goods — the  accompanying  papers  being  of  such  a 
nature  as  to  give  the  purchaser  of  the  bill  a  lien  upon  the  goods. 
These  bills,  when  drawn  in  accordance  with  the  well-established 
usage,  are  readily  sold  in  London,  Paris,  and  other  great  money 
centres.  The  banker  is  thus  placed  in  the  position  of  being  able  to 
carry  them  in  his  discounts,  or  of  realizing  upon  them  at  a  day's 
notice,  if  he  desires  to  do  so,  for  the  purpose  of  increasing  his 
reserve. 

Third.  "Foreign  commerce  benefits  the  American  banker"  by 
furnishing  for  the  funds  in  his  hands  a  legitimate  field  for  use, 
and  thereby  lessening  the  temptation  to  enter  the  field  of  speculative 
capitalization.  As  the  commerce  of  a  nation  increases  the  number 
of  current  bills  of  exchange  increases  correspondingly.  These  offer 
to  the  banker  an  ever-present  legitimate  investment  of  far  greater 
safety  than  the  average  commercial  paper  and,  as  I  have  already  said, 
are  susceptible  of  the  quickest  realization.  A  bank,  whether 
domestic  or  international,  that  is  engaged  in  supplying  the  financial 
needs  created  by  growing  foreign  commerce  should  be  a  purely 
mercantile  bank,  and  its  funds  being  fully  required  in  facilitating 
trade,  it  cannot  be  in  any  way  connected  with  the  floating  of 
industrial  enterprises,  or  with  the  placing  of  their  resultant  securities. 

In  summing  up,  you  will  agree  with  me  that  the  development  of 
our  banks  is  intimately  associated  with  the  commercial  future  of 
the  country  and  that  with  our  rapidly  growing  wealth  the  best 
method  of  utilizing  the  country's  surplus  funds,  so  that  they  may 
serve  as  a  valuable  lever  with  which  to  move  the  world's  commerce 
to  and  from  our  shores,  is  one  of  the  most  important  economic 
questions  of  the  day. 

Up  to  the  present  time  our  domestic  and  the  European  trade 
which  we  have  developed,  have  furnished  sufficient  outlet  for  our 
activities.  It  is  so  no  longer.  Our  foreign  commerce  to-day,  in 
certain  staples,  is  of  such  importance  to  us  that  legislation  abroad 


GENERAL  BANKING  SECTION  23 

which  would  affect  it  adversely  would  cause  acute  financial  distress 
in  this  country.  For  this  reason,  even  though  the  enactment  of  such 
legislation  seems  improbable,  we  should  be  swift  to  seize  the  oppor- 
tunity to  open  other  markets,  to  the  end  that  if  some  outlet  should 
be  closed  there  would  yet  remain  others  sufficient  to  our  needs. 

There  is  no  doubt  that  the  commerce  of  the  Orient,  great  as  it 
is  to-day,  will  be  enormously  increased  in  the  near  future  under  the 
stimulus  of  American  capital,  American  methods,  and  American 
brains,  and  that  as  a  result  we  shall  see  our  country  pass  through  an 
experience  through  which  Great  Britain  has  already  passed :  namely, 
that  when  a  country  takes  up  on  a  large  scale  the  development  of  its 
commerce  with  distant  lands,  there  results  a  marvelous  expansion 
of  foreign  trade,  which  increase  many-fold  the  nation's  domestic 
capital  and  profits. 


BANKING  CONDITIONS  IN  WALL  STREET 

ADDRESS    DELIVERED    BY    THOMAS    F.    WOODLOCK,    OF    NEW    YORK    CITY,    BEFORE    THE 
MINNESOTA    BANKERS'    ASSOCIATION,    AT    LAKE    MINNETONKA,    JUNE,     1904. 

As  commercial  bankers  you  will  readily  understand  when  I 
remind  you  that  in  the  industrial  and  commercial  life  of  this  country 
the  ultimate  function  of  commercial  banking  is  very  much  the  same 
as  that  of  the  machinery  of  transportation — viz.,  to  facilitate  the 
movement  and  exchange  of  commodities  of  general  use.  It  takes 
more  than  rails,  cars,  and  locomotives  nowadays  to  move  freight 
from  place  to  place ;  it  takes  credit,  and  banks  are  the  collectors, 
sellers,  and  distributors  of  credit.  Last  year  the  railroads  of  the 
United  States  transported  about  1,100,000,000  tons  of  freight,  and 
banking  credit  was  practically  as  necessary  to  the  movement  of  this 
freight  as  were  the  railroads  themselves. 

The  process  of  exchange  of  commodities  is  accomplished  by  a 
constant  barter  of  commodities  for  credit  and  credit  for  commodities. 
Credit  circulates  like  the  blood  through  all  the  wins  and  arteries  of 
a  civilized  community,  and  the  banks,  indeed,  may  be  called  the 
veins  and  arteries  of  the  country.  The  hank  gathers  up  credit  from 
a  multiplicity  of  sources,  and  masses  it  for  mobilization  in  detach- 


24   PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

raents  much  as  troops  are  massed.  It  then  distributes  it  where  it 
is  needed ;  that  is,  to  those  who  wish  to  horrow.  The  seller  of  com- 
modities acquires  credit  through  the  sale,  and  this  credit,  through 
the  bank,  is  made  available  to  the  buyer.  Not  until  commodities 
have  finally  passed  from  the  hands  of  the  original  producer  to  those 
of  the  ultimate  consumer  does  the  bank  cease  its  function.  At  all 
intermediate  stages  it  has  work  to  do  in  the  merchandising  of  the 
credit. 

The  movement  of  commodities  from  producer  to  consumer  being 
the  predominant  function  of  purely  commercial  banking,  it  is  clear 
that,  conducted  with  ordinary  discretion  and  care,  banking  ought 
to  be  the  safest  and  soundest  business  that  anyone  could  desire ;  for 
commodities  are,  after  all,  the  only  things  that  are  really  wealth. 
You  remember  the  old  legend  of  King  Midas,  who  by  his  touch  con- 
verted everything  into  gold.  At  first  sight,  he  might  appear  to  be 
the  very  type  of  a  rich  man ;  but  when  you  consider  the  extremely 
limited  use  to  which  gold  can  be  put,  aside  from  its  currency  use, 
and  when  you  consider  that  whatever  commodities  King  Midas 
touched  instantly  became  gold,  you  will  admit  that,  of  all  men  on 
this  earth,  he  was  the  poorest.  Nothing  is  more  convertible,  in  the 
long  run,  than  food,  for  nothing  is  of  more  universal  use.-  What 
kind  of  collateral  could  be  better  than  grain  or  cattle  paper,  from  this 
point  of  view  ?  Last  October,  when  we  had  serious  trouble  in  Pitts- 
burg a  ">d  Baltimore,  I  called  upon  Mr.  Forgan,  the  distinguished 
president  of  the  First  National  Bank  of  Chicago,  to  inquire  of  him 
how  things  were  with  Chicago  banks.  He  put  a  new  thought  into 
my  narrow  Wall  Street  mind  when  he  answered  me  that  the  Chicago 
banks  were  lending  their  money  on  the  best  collateral  in  the  world — 
viz.,  grain  and  provisions ;  and  that  therefore  they  were  all  right. 
After  all,  it  is  only  by  convertibility  into  food,  fuel,  clothing,  and 
shelter  that  anything  becomes  of  value.  Gold  is  wealth  because  of 
its  convertibility ;  and,  in  the  same  way,  credit  is  wealth. 

The  bank  merchandises  credit,  buying  from  the  depositors  and 
paying  them,  sometimes  in  interest  and  facilities.  It  sells  to  the 
borrower,  and  makes  its  profits  between  the  two.  It  stands  ready 
at  all  times,  at  all  events  in  theory,  to  pay  its  depositors  or  to  make 
fresh  loans.  The  whole  "law  and  the  prophets"  of  banking  may  be 
summed  up  in  one  thing — viz.,  convertibility  of  assets,  or,  in  other 


GENERAL  BANKING  SECTION  25 

words,  security  of  loans.  So  far  as  the  banks  of  the  country  are 
concerned,  and  particularly  the  banks  outside  of  the  central  reserve 
cities,  their  loans  are  made  mainly  for  use  in  transportation  and  ex- 
change of  commodities.  There  are,  in  round  numbers,  eleven 
thousand  banks  in  the  United  States,  taking  national  and  state 
banks  together  (excluding  savings  banks,  which  are  essentially  in- 
vestment companies),  and  these  banks  have  approximately  $5,000,- 
000,000  of  loans  outstanding.     These  loans  would  probably  consist 

of: 

Loans  on  real  estate  and  collateral  securities $1,750,000,000 

Commercial    credits 3,250,000,000 

If  anything,  I  have  overstated  the  amount  of  collateral  and  real- 
estate  loans  in  this  estimate.  In  Minnesota  alone  the  statement 
would  be  about  as  follows : 

Loans   on    real    estate   and   collateral    securities $21,000,000 

Commercial    credits 94,000,000 

Total     $115,000,000 

Thus,  as  regards  all  the  banks  of  the  United  States,  65  per  cent, 
of  the  loans  would  be  commercial  credits  mainly  employed  in  the 
transportation  and  exchange  of  commodities,  while  in  the  case  of 
Minnesota  80  per  cent,  of  the  loans  would  be  of  this  kind.  As  every- 
body knows,  the  bank  is  usually  synchronous  in  its  appearance  with 
the  railroad  in  a  new  town,  and  the  church,  the  school,  and  the 
newspaper  are  usually  close  upon  their  heels. 

In  brief,  then,  the  function  of  commercial  banking  is  to  facilitate 
the  production,  transportation,  and  distribution  of  commodities  of 
general  use  through  all  the  stages  that  lie  between  the  original 
producer  and  the  ultimate  consumer.  In  New  York,  and  more 
particularly  in  Wall  Street,  our  banks  perform  a  different  function. 
They  conduct,  in  a  word,  a  financial  banking  business,  which  does 
for  property  other  than  commodities  what  commercial  banking  does 
for  commodities.  Financial  banking  facilitates  the  transportation  of 
property  through  all  its  metamorphoses  from  the  band-  of  one 
owner  to  those  of  another.  Financial  banks  merchandise  credit  just 
commercial  banks  do;  but,  of  course,  a  different  set  of  problems 
arises. 

This  distinction  between    commercial    and   financial    banking   is 
very  simple.     So  is  the  principle  of  finance  itself.     If  you  come  to 


26   PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

think  of  it.  the  art  of  finance  consists  in  the  transfer  of  property 
from  hand  to  hand,  which,  in  the  generality  of  cases,  means  the  sup- 
plying- of  investments  and  the  collection  of  capital  for  investment. 
As  conducted  nowadays,  it  means,  in  fact,  the  manufacture  or  col- 
lection of  securities  and  their  sale  to  investors.  By  investors  I 
mean  those  who  purchase  to  hold  for  investment,  as  contrasted  with 
those  who  are  traders,  or  speculators,  because  they  purchase  for 
quick  re-sale.  You  are,  of  course,  entirely  familiar  with  the  nature 
of  securities,  which  is,  in  the  main,  twofold.  Securities  are  either 
evidences  of  title  or  equity,  or  evidence  of  debt.  I  need  not  waste 
time  in  describing  them  in  detail,  further  than  to  remind  you  that 
they  exist  in  every  shape,  manner,  and  form,  and  are  of  every  grade 
of  value.     Their  variety  is  almost  infinite. 

In  order  to  explain  the  principal  operations  of  financial  banking, 
I  shall  take  a  hypothetical  case  of  the  very  simplest  form,  and  I 
think  you  will  be  able  to  follow  the  various  stages  of  the  operation. 
Let  us  suppose  a  bank  starting  business  with  a  capital  of  $1,000,000 
and  a  surplus  paid  in  of  $1,000,000.  The  bank  is  able  to  secure 
100  depositors,  each  of  whom  has  100,000,  making  a  total  of  $10,000,- 
000  on  deposit  account.  It  loans  to  90  individual  manufacturers  of 
cigars  the  sum  of  $100,000  each  for  use  in  their  business,  so  that  its 
loans  amount  to  $9,000,000.  The  bank's  condition  is  then  expressed 
in  the  following  statement  of  assets  and  liabilities : 

ASSETS 

Loans    $9,000,000 

Cash    in    vaults 3,000,000 

Total    $12,000,000 

LIABILITIES 

Deposit    account $10,000,000 

Capital    and    surplus 2,000,000 

Total    $12,000,000 

The  bank  is  doing  a  commercial  business,  as  it  is  lending  money 
to  cigar  manufacturers  on  commercial  paper  and  notes.  Some  of 
this  money  it  is  lending  on  call,  and  some  on  time,  so  that  it  may  be 
able  to  meet  any  demands  that  its  depositors  may  make  upon  it. 
Among  the  directors  of  the  bank  is  a  financier,  or  promoter,  who  is 
cognizant  of  the  business  of  the  bank.     The  idea  occurs  to  him  that 


GENERAL  BANKING  SECTION 


27 


a  trust  can  be  formed  of  the  cigar  manufacturers,  from  which  a 
promotion  profit  can  be  extracted.  He  sends  his  agents  to  investi- 
gate the  condition  of  the  various  manufacturers'  plants,  and  the  in- 
formation that  he  secures  confirms  his  original  idea.  He  thereupon 
secures  an  option  from  each  of  the  manufacturers  to  purchase  his 
business  at  a  certain  price.  The  price  is  fixed  upon  such  a  basis 
that  the  borrowings  of  the  manufacturers  at  the  bank  are  to  be  paid 
off,  and  each  manufacturer  is  to  have  stock  in  the  new  trust.  The 
financier  proposed  a  capitalization  of  $10,000,000  bonds,  $10,000,000 
preferred,  and  $10,000,000  common  stock,  and  it  is  understood  that 
the  bonds  are  to  be  sold  to  him  at  90  cents  on  the  dollar;  thus  pro- 
viding the  $9,000,000  necessary  to  pay  off  the  borrowings  at  the 
bank ;  and  he  has,  further,  the  option  of  buying  the  stocks  of  the  new 
trust  at  60  cents  on  the  dollar  for  the  preferred  stock,  and  30  cents 
on  the  dollar  for  the  common  stock.  He  is  bound,  therefore,  to 
provide  $9,000,000  of  cash,  for  which  he  gets  $10,000,000  bonds, 
and  he  has  the  right  of  putting  up  $9,000,000  more  cash  to  get  all 
the  stocks  of  the  company  to  be  formed. 

He  organizes  as  a  syndicate  to  take  the  bonds  at  90,  agreeing 
with  the  syndicate  that  they  shall  ultimately  be  sold  to  the  public  at 
par;  thus  netting  a  profit  of  $1,000,000  on  the  $10,000,000  bonds. 
Of  this  $1,000,000  he  has  to  have  $250,000  for  himself,  representing 
the  compensation  for  his  initial  risk  and  trouble,  the  rest  being 
divided  pro  rata  among  the  members  of  the  syndicate.  The  syndi- 
cate is  formed.  On  a  certain  day  payment  is  to  be  made  to  the 
cigar  manufacturers,  who  will  receive  $10,000,000  preferred  stock 
and  $10,000,000  common  stock  in  the  new  company,  and  have  their 
loan  at  bank,  amounting  to  $9,000,000,  paid  off.  On  paying  off 
these  loans  the  syndicate  will  have  $10,000,000  bonds  of  the  new 
company.  Inasmuch  as  the  bank  is  going  to  be  paid  its  $9,000,000 
of  commercial  borrowings,  it  has  $9,000,000  to  loan  the  syndicate, 
and  accordingly  the  financier  arranges  to  borrow  $9,000,000  from 
the  bank  for  the  syndicate,  which  puts  up  as  collateral  securities  as 
margin  as  the  bank  may  desire,  these  securities,  of  course,  being 
taken  from  the  syndicate's  own  resources.  The  arrangement  is 
satisfactory,  and  on  the  day  appointed  (he  deal  takes  place.  The 
bank's  condition  is  then  precisely  similar  i<>  what  it  was,  except  that, 
instead  of  lending  $9,000,000  to  commercial  borrowers  on  their  own 


28   PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

notes,  it  is  lending  $o,,ooo,ooo  on  collateral  securities  to  the  syndi- 
cate. The  former  manufacturers  arc  now  stockholders  in  the  cor- 
poration, subject  to  the  optional  right  of  the  syndicate  to  purchase 
their  holdings  at  an  aggregate  sum  of  $9,000,000. 

The  times  being  propitious,  the  financier  decides  that  the  public 
will  take  the  $10,000,000  bonds  at  par,  and  arrangements  are  made 
for  a  public  offering  at  that  price  on  a  given  day.  The  issue  is 
extensively  advertised,  and  it  attracts  the  notice  of  the  bank's  depos- 
itors. 100  in  number,  each  having  $100,000  to  his  credit.  Each 
depositor  makes  up  his  mind  that  the  bonds  are  a  good  thing,  and 
each  subscribes  for  $100,000,  being  the  amount  of  his  idle  money  on 
deposit.  The  result  is  that  the  syndicate  has  sold  its  $10,000,000 
bonds  to  realize  $10,000,000,  and,  having  paid  but  $9,000,000  there- 
for, it  has  a  profit  of  $1,000,000.  If  the  transaction  were  closed  at 
this  point,  the  $9,000,000  loaned  would  disappear  and  the  original 
$10,000,000  deposited  would  disappear,  and  there  would  be  left 
$1,000,000  deposits,  representing  the  syndicate's  profit,  and  the 
bank  would  have  $3,000,000  cash,  representing  its  own  capital  and 
surplus  and  this  $1,000,000  deposit.  The  bonds,  however,  have  gone 
so  well  that  the  financier  decides  that  it  is  wise  for  him  to  exercise 
his  option  on  the  company's  stock,  and  he  determines  to  buy  from 
the  stockholders,  under  his  option,  $10,000,000  of  the  preferred  stock 
at  60,  and  $10,000,000  of  the  common  stock  at  30,  the  total  cost 
being  $9,000,000.  He  arranges  with  the  bank  again  to  borrow 
$9,000,000,  this  time  on  the  stock  as  collateral,  with  such  other 
margin  as  the  bank  may  require,  as  in  the  case  of  the  bonds.  When 
this  operation  is  completed,  the  bank's  position  is  as  follows: 

LIABILITIES 

Deposit   to  credit   of   syndicate $1,000,000 

Deposits   to   credit    of   former   stockholders 9,000,000 

Capital    and     surplus 2,000,000 

Total     $12,000,000 

ASSETS 

Loans  to  syndicate  on  stocks $9,000,000 

Cash    in    vaults 3,000,000 

Total     $12,000,000 

The  task  of  the  syndicate  now  is  to  sell  the  stocks  thus  purchased 


GENERAL  BANKING  SECTION 


29 


at  a  profit.  This  involves  the  usual  practice  of  "making  a  market" 
for  them,  probably  on  the  curb  market.  Transactions  are  made  of 
what  is  called  a  "wash"  character,  at  continually  advancing  quota- 
tions, between  brokers  employed  by  the  syndicate.  I  regret  to  state 
that  the  financier  will  probably  endeavor  to  have  judicious  para- 
graphs inserted  in  newspapers  calling  attention  to  the  great  merits 
of  these  stocks.  Some  newspapers  will  print  them ;  others  will  not. 
Finally,  quotations  for  the  preferred  stock  being  marked  up  to  65, 
and  quotations  for  the  common  stock  being  marked  up  to  35,  the 
stirrings  of  cupidity  make  themselves  felt  in  the  hearts  of  the 
gentlemen  who  took  the  company's  bonds  for  investment.  These 
gentlemen  are  convinced  that  the  time  has  arrived  for  them  to  take 
a  little  speculative  "flyer"  in  the  company's  stock,  and,  strange  to 
relate,  each  one  elects  to  buy  for  himself  on  speculation  1,000  shares 
of  the  preferred  stock  at  65  and  1,000  shares  of  the  common  stock 
at  35.  Being  speculators  in  this  instance,  they  have  to  borrow 
money  in  order  to  pay  for  the  stocks,  and  as  each  one  has  $100,000 
bonds  of  the  new  company,  each  has  plenty  of  margin  with  which  to 
make  a  loan.  Consequently,  they  go  to  the  bank  and  borrow  $100,- 
000  each  on  1,000  shares  of  preferred  stock  and  1,000  shares  of 
common  stock,  with,  say,  $30,000  of  bonds  as  margin ;  the  syndicate, 
having  sold  the  stock,  which  cost  it  $9,000,000,  to  speculators  for 
$10,000,000,  making  another  profit  of  $1,000,000  on  the  operation, 
and  besides  being  enabled  to  pay  off  its  borrowing  at  the  bank. 
After  this  operation  the  position  of  the  bank  is  as  follows: 

LIABILITIES 

Deposits    of   the    syndicate $2,000,000 

Deposits  of   former   stockholders 9,000,000 

Capital    and    surplus 2,000,000 

Total     $13,000,000 

ASSETS 

Loans  to  speculators  on  company's  stocks  and  bonds..  $10,000,000 
Cash    in    vaults 3,000,000 

Total     $1 3,000,000 

The  syndicate  has  cleaned  up  $2,000,000  on  the  operation  and  is 
content.  The  original  cigar  manufacturers  have  not  merely  sold 
their  business  to  the  trust,  but  have  sold  their  stock-holdings  in  the 
trust,  and  are  now  plain  capitalists  with  $9,000,000  to  their  credit 


30       PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

at  the  hank.  The  original  depositors  are  now  speculators  in  the 
company's  stocks  and  investors  in  the  company's  bonds.  Incidentally, 
they  are  borrowers  of  $10,000,000. 

In  a  little  while  the  cigar  trust  falls  upon  evil  days,  and  the 
dividend  on  the  common  stock,  which  was  started  on  a  4  per  cent, 
basis,  has  to  be  suspended.  The  speculators  become  alarmed,  and 
endeavor  to  sell  their  speculative  holdings.  The  price  of  the  pre- 
ferred stock,  which  cost  them  65,  falls  to  55  ;  and  the  price  of  the 
common  stock,  which  cost  them  35,  falls  to  25.  The  original  stock- 
holders see  an  opportunity  to  purchase  their  holdings  for  less  money 
than  they  received  when  they  sold  them,  and  they  conclude  to  re-pur- 
chase at  55  and  25,  making  a  total  cost  of  $8,000,000.  They  have 
$9,000,000  on  deposit  at  the  bank,  and  they  use  $8,000,000  of  this  to 
buy  back  the  stocks  from  the  speculators,  who  have  borrowed  $10,- 
000,000  on  them.  The  speculators  are  thus  enabled  to  pay  off 
$8,000,000  of  their  $10,000,000  borrowings,  leaving  $2,000,000  still 
borrowed  on  security  of  $3,000,000  of  the  company's  bonds.  When 
this  operation  is  completed,  the  bank's  position  is  as  follows : 

LIABILITIES 

Deposit  to  credit  of  syndicate $2,000,000 

Deposits    remaining  of    former  stockholders 1,000,000 

Capital    and    surplus 2,000,000 

Total     $5,000,000 

ASSETS 

Loans  to  speculators  on  bonds $2,000,000 

Cash    in    vaults 3,000,000 

Total     $5,000,000 

The  affairs  of  the  trust  go  from  bad  to  worse,  and  there  is  a 
question  of  its  ability  to  continue  interest  payments.  The  price  of 
the  bonds  falls  materially,  and  the  bank  becomes  anxious.  It  calls 
upon  the  speculators  for  more  margin,  and  gets  from  each  another 
$10,000  bonds,  being  $4,000,000  in  all,  to  secure  loans  of  $2,000,000. 
The  price  of  the  bonds  falls  further,  and  the  bank  demands  pay- 
ment of  the  loans.  The  financier,  having  taken  pains  at  the  outset 
to  inform  himself  of  the  true  conditions,  and  knowing  that  the 
depression  in  the  cigar  trust's  affairs  is  but  temporary,  decides  that 
it  would  be  a  good  plan  for  his  syndicate  to  make  a  bid  to  the  bor- 


GENERAL  BANKING  SECTION  31 

rowers  of  50  cents  on  the  dollar  for  $4,000,000  of  the  bonds,  this 
being  just  enough  to  enable  them  to  pay  off  their  borrowings  at  the 
bank,  and  this  being  exactly  the  amount  of  the  deposit  to  the  syndi- 
cate's credit,  representing  their  profits  on  the  business.  The  spec- 
ulators accept  his  offer.  He  buys  for  his  syndicate  $4,000,000  of 
the  bonds  at  50  cents  on  the  dollar.  The  speculators  are  able  to 
pay  off  the  $2,000,000  they  owe  at  the  bank,  the  syndicate  drawing 
on  its  $2,000,000  deposit  to  pay  for  the  bonds.  The  bank's  position, 
then,  stands  as  follows : 

LIABILITIES 

Deposit  of  former  stockholders $1,000,000 

Capital    and    surplus 2,000,000 

Total     $3,000,000 

ASSETS 

Cash    on    hand $3,000,000 

The  original  stockholders  think  they  need  a  little  ready  money 
on  hand,  and  they  draw  out  their  deposits  in  cash,  leaving  the  bank 
exactly  where  it  started — viz.,  with  $2,000,000  cash  in  its  vaults, 
representing  its  paid-up  capital  and  surplus.  I  have  omitted  to  take 
any  account  of  the  matter  of  interest,  so  as  not  unnecessarily  to 
complicate  the  figures,  and  it  is  only  a  matter  of  detail  anyhow. 

Observe  what  has  occurred.  Ninety  separate  and  distinct  bor- 
rowers, each  borrowing  $100,000,  and  each  owning  a  cigar  manu- 
facturing business,  have  been  formed  into  a  corporation.  One 
hundred  individual  depositors  of  $100,000  each,  making  $10,000,000 
in  all,  have  become  investors  in  the  bonds  of  the  corporation,  and  a 
syndicate  headed  by  a  financier  has  extracted  $2,000,000  profit  from 
the  whole  operation.  If  we  suppose  the  company's  bonds  again  to 
become  worth  par,  the  "profit  and  loss"  of  the  operation  will  be 
a  gain  to  the  syndicate  of  $4,000,000,  as  it  invested  its  $2,000,000 
profit  in  bonds  at  50  cents  on  the  dollar,  which  $4,000,000  has  been 
lost  by  the  speculators  who  originally  had  $10,000,000  deposits  in 
the  bank,  and  have  only  $6,000,000  of  bonds.  The  position  of  the 
individual  borrowers  at  the  start  is  exactly  the  same,  inasmuch  as, 
while  they,  as  stockholders  of  the  company,  are  now  borrowing 
$10,000,000  on  the  company's  bonds,  in  place  of  the  $9,000,000  they 
originally  borrowed  on  I  heir  own  notes,  they  have  secured  $1,000,- 
OOO  in  cash,  which  accounts  for  the  difference. 


32 


PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 


It  is  important  to  note  the  factors  that  may  be  operative  so  far 
as  the  bank  is  concerned  at  the  various  stages  of  the  whole  business. 
While  the  bank  is  doing-  a  commercial  business,  it  must,  of  course, 
so  arrange  its  commercial  loans  as  to  have  maturities  falling  in  all 
the  time,  and  thus  be  able  to  pay  its  depositors.  I  need  not  enlarge 
upon  this  aspect,  as,  of  course,  it  is  very  familiar  to  you  as  com- 
mercial bankers.  At  the  second  stage  of  the  operation,  however, 
where  the  bank  is  lending  on  collateral  securities,  the  problem  is  a 
little  different.  Its  ability  to  meet  a  sudden  call  on  its  depositors 
depends  on  the  ability  of  the  syndicate  to  pay  its  loans.  The  syndi- 
cate can  pay  its  loans  only  by  being  able  to  sell  securities  for  cash, 
either  the  collateral  securities  upon  which  it  is  borrowing  or  such 
other  securities  as  it  may  have  in  its  resources.  Somebody  must  be 
able  to  buy  the  securities  from  the  syndicate  for  cash,  or  the  syndi- 
cate cannot  pay  its  loans.  It  is  evident  that  a  sale  to  speculators 
merely  will  not  improve  the  case,  unless  the  speculators  can  borrow 
money  elsewhere  than  at  the  bank,  because,  if  the  speculators  had 
to  borrow  from  the  bank,  there  would  simply  be  a  shifting  of  loans 
from  one  borrower  to  another,  which  would  not  provide  the  means 
to  pay  depositors.  Therefore,  if  the  depositors  of  a  financial  bank 
want  their  money,  the  collateral  upon  which  the  bank  is  lending 
must  be  marketable  to  somebody  who  can  provide  the  money  for  the 
depositors.  Convertibility  of  loans  is  just  as  much  the  first  requisite 
of  financial  banking  as  it  is  of  commercial  banking,  but  you  will 
readily  understand  that  the  sale  of  securities  to  investors  is  quite  a 
different  thing  from  the  sale  of  commodities  to  consumers.  Where 
a  bank  is  lending  on  speculative  securities,  convertibility  in  the  full 
sense  of  the  word  is  more  difficult  than  where  it  is  lending  on  strict- 
ly investment  securities.  First-class  railroad  bonds,  for  instance, 
can  always  be  sold  to  investors  at  a  price,  except  in  times  of  extra- 
ordinary monetary  stringency.  Even  then  they  can  be  sold,  be- 
cause they  are  the  first  things  that  an  investor  will  buy.  Stocks  of 
a  speculative  character  cannot  always  be  sold.  There  comes  a  time, 
about  once  in  so  often,  when  we  have  a  panic.  Such  a  time,  for 
example,  was  May  9,  1901.  The  panic  at  that  time  came  in  the 
forenoon,  and  there  was  time  for  the  rally  before  the  close  of  the 
market,  the  closing  prices  being,  of  course,  the  basis  for  settlement. 
Had  the  panic  come  at  two  o'clock  in  the  afternoon,  and  had  the 


GENERAL  BANKING  SECTION  33 

market  closed  at  the  panic  prices,  there  would  have  been  a  record 
of  insolvencies  such  as  never  has  been  seen.  The  banks  would,  of 
course,  have  been  very  heavy  losers  all  around. 

The  hypothetical  case  that  we  have  considered  contains  the 
general  principles  of  financial  banking,  and,  in  fact,  of  finance  as  it 
is  conducted  in  Wall  Street.  The  banking  business  of  Wall  Street 
is  carried  on  by  two  classes  of  institutions — viz.,  the  Clearing  House 
banks  and  the  trust  companies.  These  two  classes,  together  with  a 
few  private  lenders  and  the  life-insurance  companies,  furnish  the 
credit  in  Wall  Street.  The  volume  of  credit  of  all  is  probably  in  the 
neighborhood  of  at  least  $1,500,000,000.  It  is  impossible  to  give 
definite  figures  at  a  certain  time,  because  the  trust  companies  do  not 
report  their  operations  except  twice  a  year,  to  the  State  Banking 
Department.  You  are,  of  course,  familiar  with  the  relations  of  the 
trust  companies  to  the  banks.  Trust  companies  do  not  carry  a 
regular  cash  reserve,1  as  the  banks  do,  but  use  the  banks  as  deposit- 
ories of  their  surplus  funds,  upon  which  they  obtain  interest  much 
as  the  country  banks  do  from  their  reserve  agents.  The  result  of 
this  is  that  the  cash  reserves  of  the  associated  banks  have  to  support, 
not  merely  the  operations  of  the  banks  themselves,  but  also  the 
operations  of  the  trust  companies.  A  trust  company,  for  instance, 
which  has  $20,000,000  deposits,  will  lend  perhaps  $15,000,000  of 
this  amount  directly,  and  will  deposit  the  other  $5,000,000  with  one 
of  the  Clearing  House  banks.  The  cash  in  its  own  vaults  will  con- 
sist of  perhaps  its  capital  and  surplus,  and  no  more.  On  a  given 
day  the  weekly  bank  statement  will  show,  for  example,  as  follows: 

Deposits    $1,100,000,000 

Loans     950,000,000 

Cash 275,000,000 

These  figures  show  only  the  operations  of  the  Clearing  House 

banks.     At  the  same  time  the  trust  companies  will  have : 

Deposits    $500,000,000 

Loans     375,000x100 

Cash     25,000,000 

and  they  will  have  on  deposit  with  the  banks  $125,000,000,  the  cash 
in  their  vaults  representing  their  capital  and  surplus.     Now,  when 
rtaining  the  true  position,  we  have  to  combine  the  two  state- 
ments, eliminating  the  duplication   in  deposits  caused  by  the  trust 
'At  present  the  laws  of  the  State  of  New  York  require  the  maintenance 
of  a  regular  cash  reserve. 
3 


34   PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

companies  redepositing  with  the  banks,  and  we  should  get  a  consol- 
idated statement;  as  follows: 

Deposits    $1,475,000,000 

Loans     1,325,000,000 

Cash    300,000,000 

This  would  represent  the  actual  condition  of  affairs,  as  far  as 
the  public  is  concerned,  taking  the  trust  companies  and  banks  to- 
gether.    I  need  not  pause  here  to  criticise  the  bank  statement  at  any 
length,  but  it  is  easy  to  see  how  useless  it  is  as  an  indication  of  the 
true   conditions.     For  example,   in   times  of  very  easy  money  the 
tendency  will  be  for  the  trust  companies,  instead  of  lending  all  their 
deposits,  or  nearly  all,  themselves,  to  redeposit  a  considerable  pro- 
portion with  the  banks  at  interest.     When  money   becomes  more 
active,  the  trust  companies  will  aim  to  make  their  own  loans,  and 
secure  all  the  benefit  therefrom,  and,  consequently,  they  will  draw 
down  their  deposits  with  the  banks.     Take  the  bank  statement  as  I 
gave   it   a   moment   ago — viz.,    deposits    $1,100,000,000,    and    loans 
$950,000,000.    The  banks  are  holding  $125,000,000  of  trust-company 
deposits.     The  money  rate  goes  up,  and  the  trust  companies  lend 
$50,000,000  of  this  $125,000,000,  thus  reducing  their  bank  deposits 
by  so  much.     They  take  this  business  away  from  the  banks,  and  the 
bank's  statement  shows  $50,000,000  less   deposits  and  $50,000,000 
less  loans,  with  a  consequent  increase  of  $12,500,000  in  surplus  re- 
serve; whereas,  in  reality,  the  volume  of  credit  outstanding  is  the 
same,  and  the  cash  reserve  is  the  same,  there  simply  having  been  a 
transfer  of  accounts  from  the  reporting  arbitrage  banks  to  the  non- 
reporting  trust  companies.     Under  such  conditions  the  bank  state- 
ment is  not  merely  worthless,  but  absolutely  misleading.     If,  how- 
ever, it  were  to  include  a  separate  statement  every  week  of  trust- 
company  deposits,  the  changes  in  that  item  would  give  a  very  fair 
indication  of  what  was  going  on.     Everybody  would  know  that,  if 
trust-company  deposits   with  banks   went  down  $50,000,000,  trust- 
company  loans  had  probably  increased  that  amount,  offsetting  a  cor- 
responding increase  in  bank  loans.     Unfortunately,  the  tendency  in 
New  York  is  not  toward  increasing  the  information  available  to  the 
public.     New  York  is  the  principal  reserve  city  in  the  United  States, 
and  as  such  it  has  to  take  up  and  let  out  what  might  be  called  the 
currency  slack  at  certain  times  of  the  year.     Wall  Street  banks 


GENERAL  BANKING  SECTION  35 

have  to  ship  anywhere  from  $30,000,000  to  $40,000,000  cash  west 
and  south  every  fall,  which  cash  comes  back  in  the  fall,  winter,  and 
spring.  This  strain  necessarily  falls  upon  the  financial  community, 
and  is,  of  course,  a  tremendous  factor  in  speculation.  It  must  not 
be  forgotten  that  the  line  between  finance  and  speculation  is  excess- 
ively thin,  and  by  no  means  straight.  There  are  very  few  financial 
operations  that  have  not  a  very  large  infusion  of  speculation  in 
them.  Financial  banking  must  be  conducted  with  an  eye  on  the 
stock  ticker  and  an  ear  always  open  to  the  slightest  whispers  of  the 
market. 

Our  banks  are  very  largely  directed  by  men  who  are  themselves 
prominent  in  the  management  of  railroad  and  industrial  companies, 
and  by  men  who  are  thoroughly  versed  in  lore  of  the  stock  market. 
Xew  York  bankers  are,  with  few  exceptions,  steeped  in  the  atmo- 
sphere of  stock-market  business,  and  the  ticker  takes  a  good  deal 
of  their  attention.  I  do  not  mean  to  imply  that  they  are  speculators, 
in  any  sense  of  the  word,  as  individuals.  What  I  mean  is  that  the 
stock  market  reflects  those  activities  upon  which  the  greater  part 
of  Wall  Street  banking  depends.  The  stock  market  is  the  one  place 
where  the  banks'  borrowers  can  get  money  if  they  have  to,  and  to 
the  stock  market  they  must  go  when  depositors  have  to  be  paid. 
Taking  the  Wall  Street  banking  situation  as  a  whole,  in  time  of 
stress,  when  the  country  banks  call  home  their  money,  there  is  just 
one  thing  to  be  done,  and  that  is  liquidation  in  the  security  market. 
By  liquidation  I  mean  the  sale  of  securities  to  ultimate  consumers ; 
that  is,  to  ultimate  investors.  In  the  early  fall  of  1902,  as  is  now 
evident,  the  situation  in  Wall  Street  was  excessively  dangerous. 
Currency  was  called  for  west  and  south,  loans  were  heavily  extended 
in  all  directions,  and  securities  were  high.  Secretary  Shaw  saved 
the  situation,  but  saved  it  only  by  a  hair's  breadth.  Wall  Street  got 
through  the  pinch,  but  it  took  a  year  of  liquidation  and  a  45-point 
decline  in  securities,  equal  to  33  per  cent,  of  their  value,  to  restore 
sound  credit  conditions.  Had  anything  slipped  a  cog  in  the  fall  of 
[902,  we  should  surely  haw  had  a  repetition  of  the  .May  panic, 
which  would  probably  have  been  more  lasting  and  far  more  harmful 
in  its  effects,  because  more  lasting.  Ultimate  consumers  had  to  be 
found  for  the  securities  upon  which  the  banks  were  lending  money, 
but  instead  of  having  to  find  them  in  a  hurry,  which  means  a  panic, 


36       PRACTICAL  TROBLEMS  IN  BANKING  AND  CURRENCY 

Wall  Street  was  able  to  look  for  them  in  a  more  leisurely  fashion, 
which  brought  about  the  long  decline  of  1903. 

Speculation,  as  a  word,  is  not  in  good  repute.  It  has  an  un- 
pleasant sound  in  people's  ears,  because  of  the  abuses  committed  in 
its  name.  Nevertheless,  speculation  is  one  of  the  strongest  and 
most  constant  factors  in  financial  banking,  and,  therefore,  in  Wall 
Street  banking.  When  you  remember  this,  and  when  you  remember, 
furthermore,  that  New  York  is  the  principal  storehouse  of  the 
country's  cash  for  a  great  part  of  the  year,  you  will  realize  that  the 
problems  that  present  themselves  to  the  Wall  Street  banker  in  the 
course  of  his  business  are  very  different  from  those  that  ordinarily 
fall  to  the  commercial  banker  for  solution.  Of  course,  the  great 
requisite  in  collateral  security  is  marketability,  and  in  this  respect 
Erie  common  is  as  good  a  collateral  as  Chicago  &  Northwestern,  if 
not  better.  Still,  great  mistakes  can  be  made  in  judging  convertible 
collateral.  At  the  close  of  the  boom  period  many  of  the  credit  in- 
stitutions of  Wall  Street  were  choked  up  to  an  inordinate  extent  with 
syndicate  borrowings  representing  unmarketable,  and  therefore  un- 
available, collateral.  No  one  knows  the  full  extent  of  this  kind  of 
thing,  but  it  must  have  been  very  large  in  1902.  Enormous  losses 
have  been  made  in  underwriting  since  that  time,  and  the  scars  have 
been  visible  to  anyone  who  took  the  trouble  to  read  carefully  the 
New  York  Banking  Report  for  1902  and  1903.  Happily,  liquida- 
tion has  been  accomplished  to  an  extent  that  removes  the  element 
of  danger,  and  the  banking  position  to-day  must  be  accounted  sound, 
so  far  as  Wall  Street  is  concerned. 

I  am  conscious,  and  disagreeably  so,  that  I  have  been  able  to 
touch  only  in  a  most  imperfect  fashion  upon  Wall  Street  banking 
conditions,  and  I  fear  that  I  have  done  little  more  than  recapitulate 
things  familiar  to  all.  The  one  thing  that  stands  out  most  promi- 
nent in  my  judgment,  with  reference  to  Wall  Street  banking,  is  the 
danger  of  the  concentration  of  banking  power  in  the  hands  of  a 
few  great  speculative  interests.  We  have  certain  clearly  defined 
tendencies  in  Wall  Street,  the  ultimate  effect  of  which  is  likely  to 
be  the  creation  of  two  or  three  powerful  groups  of  banks.  There 
is,  for  example,  the  so-called  Standard  Oil  group  of  banks,  headed 
by  the  National  City;  there  is  the  so-called  Morgan  Life  Insurance 
group,  with  the  National  Bank  of  Commerce  and  the  First  National 


GENERAL  BANKING  SECTION  37 

Bank  at  its  head.  These  two  groups  contain  many  of  the  most 
powerful  banks  in  New  York  City,  and  together  account  for  a  very 
large  proportion  of  the  total  volume  of  credit  at  the  disposal  of  the 
public.  To  the  credit  of  these  banks  be  it  said  that  the  immense 
power  in  the  hands  of  their  managers  has  not  been  abused  so  far, 
and  probably  will  not  be  abused  by  those  who  now  hold  it.  But 
the  connection  between  the  managements  of  the  banks  in  New  York 
City  and  the  great  financial  and  speculative  interests  is  very  close, 
and  if  ever  we  have  serious  banking  trouble,  it  will  come  from 
this  fact.  I  suppose  that  things  cannot  be  different,  but  one  cannot 
help  wishing  that  the  purely  commercial,  as  distinguished  from  the 
purely  financial,  element  were  more  prominent  in  the  management 
of  our  great  banks.  Human  nature  is  weak,  and  human  nature  is 
very  fallible.  Speculation  is  a  strong  temptation.  At  the  best, 
financial  banking  is  attended  with  more  dangers  than  commercial 
banking.  These  dangers  are  increased  by  the  temptation.  So  far, 
the  history  of  Wall  Street  banking,  though  marked  by  some  black 
spots,  is,  in  the  main,  creditable.  We  may  hope  it  will  always  be  so ; 
but  our  hopes  need  not  blind  us  so  far  as  the  dangers  that  always 
threaten  are  concerned. 


THE  RELATION  OF  THE  BANKING  CAPITAL  TO  THE 

VOLUME  OF  BUSINESS 

ADDRESS  DELIVERED  BY  FRANK  L.  MCVEY,  PROFESSOR  OF  ECONOMICS  IN  THE 
UNIVERSITY  OF  MINNESOTA,  BEFORE  THE  MINNESOTA  BANKERS'  ASSOCIATION, 
AT    LAKE    MINNETONKA,    JUNE,    I905. 

The  movement  toward  increased  volume  of  business  in  com- 
mercial and  manufacturing  fields  has  not  escaped  your  attention. 
The  business  man  tests  his  efficiency  by  the  rotation  of  his  capital 
to  his  total  business ;  he  wants  to  reach  a  big  ratio ;  but,  though  this 
is  true,  it  is  not  to  be  forgotten  that  he  constantly  supplements  his 
capital  by  issues  of  bonds  or  by  loans  on  commercial  paper.  The 
latter  method  reduces  capital  cost  to  the  minimum,  in  that  he  pays 
for  the  use  of  capital  only  during  the  season  in  which  he  needs  it. 
His  ability  to  do  this,  however,  depends  upon  the  bank  and  banker ; 


^8   PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

upon  their  ability  to  expand  their  loans  and  discount  as  he  demands 
them,  and,  incidentally,  upon  his  ability  to  offer  collateral  and  com- 
mercial paper  of  a  high  quality.  He  borrows  to  make  a  profit;  the 
bank  lends  for  the  same  reason.  Any  curtailment  of  his  ability  to 
borrow  by  the  inability  of  the  bank  to  expand  its  sale  of  credit  ac- 
counts reduces  the  business  efficiency  of  our  business  man  and  affects 
the  prosperity  of  the  community. 

This  statement  may  be  reinforced  by  putting  the  matter  some- 
what differently.  A  banker  is  engaged  in  selling  money  short  and 
agreeing  to  make  delivery  of  it  upon  demand.  In  doing  this  he  sells 
credit  accounts  for  commercial  paper  and  agrees  to  deliver  money 
upon  demand  to  the  limit  of  the  credit  account  or  deposit.  This, 
then,  brings  to  view  our  interest  in  the  relation  of  banking  capital 
to  volume  of  business,  and  raises  the  query :  How  far  can  the  banker 
extend  his  sale  of  credit  accounts  and  still  maintain  ability  to  deliver 
money  upon  demand  without  affecting  the  borrowing  of  the  com- 
munity, or,  in  fact,  without  actually  crippling  its  business? 

It  might  be  urged  that  the  bank  is  under  no  obligations  to  meet 
this  demand.  Under  our  system,  however,  that  elasticity  of 
purchasing  power  so  necessary  to  business  must  come  from  the 
banks.  We  have  no  great  central  government  bank.  The  United 
States,  providing  legal  money,  final  power  of  payment,  after  a  long 
and  bitter  experience,  in  which  the  distinction  was  necessarily  made 
between  what  might  be  called  "credit  money"  and  "credit  accounts," 
decided  that  the  issue  of  money  should  be  taken  over  as  one  of  its 
essential  duties.  This  left  the  banks  with  the  functions  of  making 
loans  and  discounts  and  of  receiving  deposits.  Mr.  Dawes  recently 
stated  that  the  bank  accounts  used  by  the  business  community 
amounted  to  $9,000,000,000,  as  against  the  $2,500,000,000  of  gold, 
silver,  notes,  and  subsidiary  coins  issued  by  the  government.  Here, 
then,  is  clear  indication  of  the  function  of  banks. 

The  community,  using  the  term  to  represent  the  business  and 
commercial  interests  of  the  nation,  wants  three  things  relative  to  this 
volume  of  bank  accounts.  These  are :  first,  elasticity  of  credits ; 
second,  ease  of  redemption  in  money ;  third,  redemption  of  such 
accounts  upon  demand  at  all  times.  The  ability  of  banks  to  meet 
this  demand  rests  fundamentally  upon  the  amount  of  its  capital 
equipment  and  the  form  of  its  investment ;  hence  the  rapid  increase 


GENERAL  BANKING  SECTION  39 

of  volume  of  business  materially  influences,  not  only  the  demand 
upon  the  banks  for  actual  money,  but  their  power  of  providing  the 
actual  money.  Our  inquiry  therefore  takes  the  form  of  this  ques- 
tion :  How  far  can  banks  increase  loans  and  discounts  without 
increase  of  capital,  and  in  what  form  must  such  capital  be  held  in 
order  to  give  the  greatest  elasticity  of  credit  accounts? 

The  sole  test  of  the  bank's  capitalization  should  be  the  ability  to 
meet  every  money  demand  upon  presentation.  As  has  been  sug- 
gested, a  business  house  can  supplement  its  capital  by  selling  bonds, 
using  the  proceeds  for  increase  of  equipment,  or  by  borrowing  the 
necessary  purchasing  power  from  a  bank  to  meet  current  expenses. 
Such  a  course  is  not  open  to  a  bank  in  good  standing,  for  a  bank 
must  furnish  money  upon  demand.  It  cannot  in  justice  to  its  cus- 
tomers borrow  continuously  for  the  purpose  of  maintaining  its 
equipment.  Neither,  for  that  matter,  can  a  business  house  do  this ; 
but  the  latter  can,  however,  meet  its  obligation  by  postponing  pay- 
ment through  the  sale  of  commercial  paper.  The  bank  must  furnish 
money  through  the  purchase  of  a  credit  account  from  the  bank. 
Hence  the  principal  element  in  the  bank's  capitalization  should  be  that 
part,  sometimes  called  redemption  equipment. 

The  redemption  equipment  consists  of  money  reserves,  balances 
with  other  banks,  unencumbered  securities,  loans  to  reserve  agents, 
less  amounts  due  to  such  agents,  and  the  margin  of  securities  over 
incumbrances,  sometimes  amounting  to  a  considerable  sum.  In  ad- 
dition to  the  redemption  equipment,  there  are  certain  unavailable 
capital  investments — unavailable  from  the  point  of  view  of  im- 
mediately available  cash,  in  that  they  are  not  convertible  into  money. 
These  investments  consist  of  banking  house,  real  estate,  and  the 
margins  bound  up  in  bonds  deposited  for  note  circulation,  bonds  held 
by  the  federal  government  against  deposits,  premiums  on  bonds, 
and  the  5  per  cent,  redemption  fund. 

Returning  to  the  redemption  equipment,  it  will  at  once  appear 
that  balances  with  other  banks  under  the  reserve  system  and  loans 
to  reserve  agents  may  not  be  available  at  once  for  use  in  meeting 
money  demands.  The  supposition  is  that  such  moneys  arc  in  their 
nature  invested  reserve :  but  in  actual  banking  operation  they  are 
a  claim  against  other  banks,  payable  upon  demand,  against  which 
are  held  a  minimum  money  reserve  required  by  law.     It  is  not,  there- 


40   PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

fore,  always  possible  to  count  upon  loans  to  reserve  agents  as  money 
available  for  expansion  of  loans  and  discounts.  In  ordinary  con- 
ditions the  money  is  paid  upon  demand  ;  but  during  times  of  stress 
the  payment  is  often  provokingly  slow.  Inquiry  concerning  the 
possession  of  bonds  may  show  that  the  bank  has  acquired  them 
through  hypothecation  or  by  underwriting.  In  such  instances  there 
may  have  been  a  reduction  in  the  principal.  Capital  impairment  of 
one  kind  or  another  may  therefore  have  reduced  the  capitalization 
of  banks,  so  far  as  the  redemption  equipment  is  concerned,  to  the 
minimum  required  by  law,  and,  what  is  still  more  serious,  fixed  the 
invested  capital  in  such  forms  that  it  is  not  possible  to  realize  money, 
in  the  actual  cash  sense,  upon  demand.  While  this  condition  of 
affairs  exists  the  power  of  expanding  credits  has  been  materially 
reduced. 

If  the  meaning  of  this  paper  is  not  now  revealed,  it  may  be  made 
clearer  by  a  quotation  from  Mr.  Cleveland's  book,  The  Bank  and  the 
Treasury.  He  says :  "The  commercial  bank  is  not  organized  for 
direct  capital  investment.  It  is  capitalized  for  the  purpose  of  sup- 
porting its  own  credit  obligations ;  and  these  credit  obligations  in 
turn  are  used  as  a  means  of  purchasing  the  current  liabilities  of 
other  business  concerns."  (P.  15.)  In  other  words,  the  support 
of  its  own  credit  obligations  requires  the  possession  of  money  and 
the  ownership  of  such  collateral  as  will  make  it  possible,  in  times 
of  stress  or  of  increased  demand  for  the  credit  obligations  of  the 
bank,  to  secure  by  hypothecation  or  sale  of  its  invested  reserve  all 
money  necessary  to  meet  the  demands  made  upon  it.  In  this  con- 
nection several  axioms  may  be  laid  down  relative  to  banking  capital. 
First,  a  bank  must  have  an  adequate  capital,  determined,  not  by  a 
rule  of  thumb,  but  by  the  demands  of  the  community  for  credit 
accounts ;  second,  such  capital  must  be  in  money,  and  invested 
securities  easily  turned  into  money  by  hypothecation  or  sale ;  third, 
the  capital  of  a  bank  is  the  real  support  of  its  credit  obligation. 

It  is  at  this  point  the  question  may  be  asked :  How  far  does  the 
actual  situation  conform  to  these  requirements?  According  to 
the  report  of  the  Comptroller  of  the  Currency,  the  deposit  liabilities 
of  national  banks  on  which  a  reserve  is  required  was,  November  25, 
1902,  $3,705,217,312.  Against  this  amount  was  held  in  cash  and  in 
funds  with  reserve  agents  and  the   5  per  cent,   redemption  fund, 


GENERAL  BANKING  SECTION  41 

$987,074,218,  or  26.24  per  cent.  The  legal  reserve  was  $817,981,- 
481,  or  but  22.08  per  cent.  On  September  9,  1903,  the  deposit  lia- 
bilities had  increased  to  $3,863,512,112,  against  which  the  banks 
held  $850,762,184,  or  22.02  per  cent.  The  percentage  of  all  available 
funds  to  deposit  liabilities  ranged  from  26.25  per  cent,  on  April  9, 
1902,  to  a  maximum  of  27.70  per  cent,  on  February  6,  1903. 

Taking  the  banks  of  New  York  City  during  the  present  year, 
we  have  an  example  of  fluctuating  reserve  in  its  effect  upon  bank 
deposits.  On  March  18,  1905,  the  banks  of  New  York  City  held  a 
surplus  reserve  of  $5,154,175,  and  loans  during  the  week  previous 
declined  $5,241,900,  and  the  deposits  $13,227,700.  On  May  20  the 
surplus  reserve  was  $8,219,995,  and  the  loans  had  increased  over  the 
previous  week  $20,709,900,  and  the  deposits  had  grown  by  the  figure 
of  $14,932,000.  This  rapid  contraction  and  expansion,  commend- 
able as  it  would  have  been  if  in  conformity  to  the  wishes  of  the 
community,  was  in  reality  at  its  expense,  as  the  banks  were  forced 
to  reduce  loans  in  order  to  increase  their  reserves. 

In  the  matter  of  capital,  the  4,601  national  banks  held  in  capital, 
surplus,  and  undivided  profits,  $1,201,148,883,  or  $261,052  per  bank, 
on  September  15,  1902.  Nearly  three  years  later,  March  4,  1905. 
the  5,587  national  banks  held  $1,386,043,600  in  capital,  surplus,  and 
undivided  profits,  or  $248,083  per  bank.  Going  back  to  December 
9,  1893,  the  situation  was  as  follows:  capital,  undivided  profits,  and 
surplus,  $1,028,841,230,  or  $273,029  capital  for  each  of  the  3,7^7 
national  banks  then  in  existence.  Now,  comparing  these  figures 
with  the  credit  accounts  or  individual  deposits,  omitting  government 
deposits  that  were  fully  protected  by  deposit  of  collateral,  we  have 
the  following:  December  19,  1893,  3,787  banks  have  $1,029,841,230 
capital  investment  and  $1,539,399,795  individual  deposits;  September 
15,  1902,  4,601  banks  have  a  capital  investment  of  $1,201,148,883 
and  $3,209,273,894  individual  deposits;  March  14,  1905,  5,587  banks 
held  $1,386,043,600  and  $3,777,474,006  individual  deposits.  Putting 
it  on  the  basis  of  individual  banks,  we  have  the  following:  In  1893 
the  capital  per  bank  was  $273,029  and  $406,231  of  deposits;  in  1902 
the  capital  per  bank  was  $261,062  and  $697,516  of  deposits;  in  1905 
the  capital  was  $248,083,  or  $675,630  of  deposits.  Thus  from  1893 
to  1902  there  had  been  a  decline  of  $1  \,<i<>7  in  the  capital  per  bank 
and  an  increase  of  $285,000  in  deposit  obligations;  from   1902  to 


42 


PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 


1005  the  capital  per  bank  declined  $12,978  per  bank  below  the  figures 
of  1902;  the  deposits  declined  to  the  amount  of  $21,886. 

Legal  reserves  were  held  by  the  national  banks  in  1893  to  the 
amount  of  $414,135,407,  or  $109,080  per  bank;  in  1902  the  reserve 
was  $507,993,738,  or  $110,409  per  bank;  in  1905  the  reserve  was 
$641,153,633,  or  $120,288.  Again  making  the  comparison  with 
previous  figures,  it  appears  that  in  1893  the  individual  bank  held 
$273,029  in  capital,  deposits  of  $406,231,  and  a  reserve  of  $109,080; 
in  1902  the  capital  was  $261,062,  deposits  $697,516,  and  reserve 
$110,409;  in  1905  the  capital  was  $248,083,  deposits  $675,630,  and 
reserve  $120,288.  The  1902  period,  as  shown  by  these  figures,  was 
the  high-water  mark  in  the  amount  of  credit  obligations  standing 
against  banks,  and  the  low-water  point  in  capital  and  reserve.  In 
other  words,  there  is  clearly  shown  here  the  marked  tendency  of 
banks  to  expand  their  credit  account  without  an  adequate  increase 
of  capital  and  reserve.  Realizing  this,  the  banks  have  attempted 
(and  it  is  perhaps  wiser  to  say  the  central  reserve  city  banks)  to  in- 
crease their  reserve  and  reduce  their  loans  and  discounts.  This, 
however,  is  not  the  method  to  prevent  disturbance.  The  difficulty 
is  that  the  present  demand  obligations  of  banks  are  too  large  relative 
to  their  capital.  Consequently,  under  present  conditions,  any  attempt 
on  the  part  of  the  banks  to  strengthen  their  position  must  be  accom- 
plished by  reducing  the  accommodations  of  the  banks  and  affecting, 
as  a  result,  the  purchasing  power  in  the  community.  This  is  the 
end  which  is  undesirable ;  it  is  not  the  end  that  can  keep  the  bank- 
ing business  up  to  the  requirements  made  upon  it. 

Elasticity  of  credit  accounts  therefore  must  rest  upon  a  capital 
sufficiently  large  to  meet  all  the  demands  made  upon  it.  Such 
demand,  however,  varies  from  16  to  30  per  cent,  of  the  average 
volume  of  credit  accounts  used  as  current  funds.  This  would 
necessitate  the  holding  of  the  reserves,  unless  some  provision  is 
made  by  which  the  banker  could  realize  some  return  upon  moneys 
held  for  reserves.  Under  present  practice  the  bank  makes  a  loan  to 
reserve  agents,  expecting  to  recall  the  loan  when  it  needs  the  funds 
for  actual  reserve  purposes.  This  practice  has  developed  into  a 
system  by  which  the  surpluses  of  banks  have  been  collected  in  a  few 
large  banks  and  the  fluctuating  money  demand  of  the  country  falls 
upon  them.     This,  to  quote  another,  is  a  "condition  which  at  times 


GENERAL  BANKING  SECTION  43 

deprives  outside  banks  of  the  support  of  central  banks,  and,  again, 
forces  New  York  banks  to  resort  to  clearing-house  certificates  for 
settlement  of  money  balances  among  themselves — a  condition  of 
financial  paralysis  to  commercial  enterprises."  Again,  the  capital 
of  the  bank  must  be  invested  in  actual  "redemption  equipment"  to  a 
greater  degree  than  now  practiced,  nor  can  any  reliance  be  had  upon 
impaired  capital  in  the  form  of  real  estate,  banking  houses,  or  the 
reserve  loans  made  to  other  banks  to  meet  this  want.  Such  part  of 
the  equipment  as  is  necessary  should  be  held  in  cash,  the  remaining 
portion  in  selected  investment,  upon  which  the  bank  may  increase 
its  money  holdings,  either  by  sale  or  hypothecation.  This  makes 
possible  an  elasticity  equal  to  any  legitimate  demand  of  the  com- 
munity; but,  what  is  more  to  the  point,  an  elasticity  not  dependent 
upon  the  financial  difficulties  prevailing  in  a  distant  money  center, 
but  fully  in  the  hands  of  the  banks  of  each  locality. 

Our  banking  system  is  a  local  banking  system.  Its  history  is  a 
history  of  many  banks,  each  meeting  the  wants  of  its  special  locality, 
while  at  the  same  time  co-operating  with  the  others.  To  continue 
to  do  this  requires,  as  I  believe  has  been  clearly  shown,  a  larger 
capitalization  and  more  careful  provision  of  both  cash  and  invested 
reserves. 


BANK  CREDITS 


ADDRESS  DELIVERED  BY  JAMES  G.  CANNON.  VICE-PRESIDENT  OF  THE  FOURTH 
NATIONAL  BANK  OF  NEW  YORK  CITY,  BEFORE  THE  NEW  JERSEY  BANKERS* 
ASSOCIATION,   AT   ATLANTIC   CITY,   MARCH,    IOO5. 

I  have  chosen  for  my  subject  "Bank  Credits,"  the  same  title  I 
gave  to  an  address  delivered  at  Drexel  Institute,  Philadelphia,  on 
November  17,  1892,  a  little  over  twelve  years  ago,  at  which  time 
there  were  not  more  than  a  half-dozen  credit  departments  in  as  many 
banks  in  the  United  States,  and,  as  I  stated  in  that  address,  during 
the  entire  period  of  the  existence  of  the  American  Bankers*  Asso- 
ciation, from  1875  until  that  date,  the  subject  of  "Bank  Credits"  had 
never  been  discussed  in  a  practical  way  by  its  members.  Since  that 
time,  '  er,  the  subject  has  come  up  for  discussion  before  many 


44       PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

state  bankers'  associations   throughout  the  country,  and  the  intro- 
duction of  credit  departments  in  banks  has  become  very  general. 

On  February  9,  1895,  the  executive  committee  of  the  New  York 
State  Bankers'  Association  adopted  resolutions  recommending  to 
its  members  "that  they  request  borrowers  of  money  from  their 
respective  institutions  to  give  them  written  statements  over  their 
signatures  of  their  assets  and  liabilities,  in  such  form  as  the  com- 
mittee on  uniform  statements  of  the  various  groups  might  recom- 
mend." Acting  upon  these  resolutions,  nearly  all  of  the  groups  of 
the  New  York  State  Bankers'  Association  adopted  uniform  state- 
ment blanks,  and  the  example  set  by  that  association  has  been 
followed  by  many  associations  in  other  states. 

In  1898,  the  National  Association  of  Credit  Men,  a  large  and 
powerful  organization  of  nearly  3,000  members,  after  a  year's 
investigation  of  the  subject,  adopted  uniform  statement  blanks,  which 
have  ever  since  been  widely  employed. 

On  September  7,  1899,  the  American  Bankers'  Association,  in 
convention  assembled  at  Cleveland,  Ohio,  adopted  a  uniform  prop- 
erty statement  blank,  to  be  supplied  to  its  members,  and  thus  placed 
the  stamp  of  its  approval  upon  the  credit  department  for  banks,  at 
the  same  time  instructing  its  secretary  to  set  up  in  his  office  a  model 
department,  and  to  furnish  information  to  its  members  regarding 
the  workings  of  the  same. 

You  might  say  that  these  efforts  were  practically  the  beginning 
of  credit  research,  and  as  we  trace  the  subject  during  the  past 
twelve  years  and  note  the  growth  of  these  methods  and  the  many 
difficulties  which  have  been  overcome,  we  certainly  feel  that  some- 
thing has  been  gained  by  the  agitation  and  discussion  of  bank  credits, 
and  much  good  has  been  accomplished. 

In  an  address  in  June,  1896,  at  the  organization  of  the  National 
Association  of  Credit  Men,  I  stated :  "Credit  can  hardly  be  classed 
among  the  sciences,  and  certainly  it  cannot  be  said  to  be  an  exact 
science,  because  it  is  not  governed  by  any  definite,  fixed  laws."  But 
after  years  of  study  of  this  subject,  I  am  beginning  to  feel  that  there 
are  certain  definite,  fixed  laws  governing  credit,  and  I  am  prepared 
to  take  a  step  forward  to-day,  designating  it  credit  science,  and  later 
I  hope  to  be  able  to  show  you  some  of  its  principles,  its  mechanism, 
and  its  guiding  rules. 


GENERAL  BANKING  SECTION  45 

It  is  becoming  evident  to  students  of  financial  affairs  that  there  is 
a  gradual  change  of  method  in  the  buying  and  selling  of  commercial 
paper  from  that  which  obtained  in  former  times.  Borrowers  no 
longer  confine  themselves  to  one  place,  but  go  where  funds  can  be 
procured  to  the  greatest  advantage.  Merchants  in  the  smaller  towns 
go  away  from  home  to  borrow  money,  and  bankers  in  smaller  cities 
go  away  from  home  to  procure  investments.  Often  bankers  do  not 
feel  that  they  can  break  the  rate  locally,  but  it  frequently  happens 
that  they  will  send  to  the  large  money  centres  and  buy  the  paper  of 
their  home  merchants  at  a  lower  rate  than  they  would  feel  that  they 
could  take  the  note  for  direct.  One-eighth  per  cent,  will  take  many 
a  business  man  from  home  for  his  accommodation.  The  practice  is 
growing  for  the  banks  in  larger  cities  to  buy  commercial  paper  for 
their  correspondents  and  in  the  face  of  these  changes  in  method  it 
becomes  more  and  more  imperative  for  bankers  who  handle  com- 
mercial paper,  and  who  are  located  in  the  large  money  centres,  to 
be  fully  informed  in  the  widest  measure  upon  the  credit  of  borrowers. 

We  have  noted  the  beginnings  of  credit  science ;  we  have  briefly 
traced  its  interesting  and  rapid  development  during  the  past  twelve 
years,  and  we  have  marked  the  changes  in  methods  which  are  calling 
for  constantly  improved  ways  and  means  of  credit  research.  Let 
us  take  the  measure  of  the  credit  science  of  to-day  in  a  few  words 
before  we  consider  the  problems  and  prospects  of  the  future. 

The  corner-stone  of  credit  science  may  be  said  to  be  the  requir- 
ing from  borrowers  of  statements  of  the  conditions  of  their  affairs. 
This  has  now  become  an  accepted  custom  in  the  relation  between 
banks  and  borrowers  on  commercial  paper.  It  has  come  to  be  recog- 
nized that  the  practice  is  of  value  to  both  the  bank  and  the  borrower, 
and  this  may  be  considered  the  reason  for  its  success.  Further- 
more, the  making  of  statements  oftentimes  renders  concerns  them- 
selves aware  of  weaknesses  in  their  methods  of  operation,  financial 
practices  and  results  of  business.  The  banker,  having  a  substantial 
interest  in  the  success  of  the  borrower,  may  frequently  give  whole- 
some advice  or  timely  warning  from  liis  wide  experience  in  com- 
mercial affairs  and  his  foresight  in  monetary  matters.  There  is  a 
distinct  parallel  in  the  results  that  have  worked  out  from  the  prac- 
tice of  giving  statements,  to  the  results  with  which  we  an-  so  familiar 
in  the  methods  of  the  national  banking  system.     Here  statements  of 


46 


PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 


conditions  and  bank  examinations  have  resulted  in  wise  improve- 
ment in  our  methods,  in  wholesome  safeguarding  of  our  funds,  in 
conservative  financing,  and  in  general  advantage.  Again,  there  is 
a  parallel  in  the  results  which  have  developed  from  the  mutual  rela- 
tions of  manufactures  and  the  factory  mutual  insurance  companies. 
Here  the  companies  called  for  improvements  in  buildings  and  equip- 
ment, which  have  rendered  fire  a  remote  contingency.  Whoever 
doubts  the  joint  interest  of  such  a  movement  has  never  experienced 
the  paralyzing  effect  which  a  fire  has  upon  the  affairs  of  any  con- 
cern. The  statement  of  condition  has  come  to  stay,  and  is  funda- 
mental in  credit  matters. 

But  if  the  statement  is  the  foundation  of  the  credit  structure,  the 
credit  department  may  be  considered  to  be  the  superstructure.  This 
division  of  the  bank's  operating  mechanism  may  be  said  to  be  the 
clearing  house  for  credit  information,  the  headquarters  for  credit 
analysis,  the  storehouse  of  facts  relating  to  those  who  are  commer- 
cial borrowers  of  the  bank's  money.  Our  credit  men  are  the  watch- 
dogs of  the  bank's  risks  and  the  guardians  of  the  investments  made 
for  its  correspondents.  The  department  must  be  manned  by  our 
most  faithful,  reliable,  intelligent,  tactful  men,  who  must  be  capable 
of  infinite  pains,  of  inexhaustible  patience,  and  of  absolute  loyalty. 
Their  eyes  and  ears  must  be  open  to  every  contingency  that  no  sign 
may  go  unheeded.  They  are  compelled  to  walk  in  the  ruts  of  routine , 
and  yet  be  pathfinders  constantly.  No  man  who  works  mechanically 
will  develop  into  a  successful  credit  man.  The  credit  department 
should  have  an  equipment  commensurate  with  its  importance.  It 
should  be  the  inner  chamber  in  all  respects.  Recorded  confidences 
should  never  be  violated,  and  there  should  be  no  latch-string  to  this 
department.  Its  mechanism  of  blanks,  files,  vaults,  and  office  fixtures 
should  be  perfectly  adapted  to  its  service,  and  every  means  which 
ingenuity  can  devise  should  be  utilized  to  assist  its  work. 

In  our  review  of  the  credit  science  of  to-day  we  have  noted  the 
universal  custom  of  giving  statements.  We  have  glanced  over  the 
mechanism  provided  for  the  handling  of  these  statements  and  cor- 
related data,  but  the  important  feature  of  all  credit  science  is: 
What  is  our  interpretation  of  these  statements?  I  wish  to  make 
clear  my  conviction  that  a  statement  which  is  not  submitted  to 
analvsis  is  a  menace.     Because,  first,  if  errors  have  been  made,  if 


GENERAL  BANKING  SECTION  47 

lack  of  judgment  on  the  part  of  the  management  of  the  concern 
has  been  shown  which  is  not  brought  to  the  attention  of  the  bor- 
rower; if  reckless  methods  have  been  indulged  in  or  any  dishonesty 
has  been  practiced,  the  very  fact  that  a  statement  has  been  received 
and  accepted  by  a  banker  either  lulls  into  a  sense  of  security  the 
careless  or  heedless  borrower,  confirms  the  reckless  financial  habit, 
or  establishes  the  dishonesty  if  such  exists.  I  repeat,  that  an  unana- 
lyzed  statement  is  worse  than  no  statement  at  all.  Frank  and  open 
statements,  bearing  upon  their  face  the  evidence  of  a  true  condition 
of  affairs,  are,  to  my  mind,  the  greatest  factors  in  establishing  credit. 
Nothing  will  more  firmly  cement  the  union  between  borrower  and 
banker  than  such  a  statement,  and  nothing  will  be  of  more  value  to 
a  banker  and  of  less  harm  to  an  honest,  enterprising  borrower. 
Hidden  facts  are  revealed  by  analysis  and  skill  in  reading  between 
the  lines  is  an  important  part  of  the  credit  man's  training.  By  this 
means,  weaknesses  may  frequently  be  discovered  and  proper  steps 
taken  to  avert  trouble  before  acute  difficulty  arises. 

Let  us  summarize,  then,  the  principles  and  rules  of  the  credit 
science  of  to-day. 

Its  principles : 

1.  To  reduce  losses. 

2.  To  eliminate  disproportionate  risks. 

3.  To  conserve  worthy  interests. 

4.  To  war  on  dishonesty  and  incompetence. 
Its   Mechanism : 

1.  The  statement  of  condition,  including — 
Assets  and  liabilities. 

Annual  business 

Net  result  of  business. 

Commercial  expenses. 

2.  The  credit  department. 

Its  guiding  rules  in  the  present  state  of  bank  credits. 

Rule  No.  1.     Quick  assets  only  are  a  basis  for  loans. 

Rule  No.  2.  Fixed  assets,  only  considered  as  giving  an  unknown 
support  to  the  quick  assets. 

Rule  No.  3.  The  debl  limit  of  the  borrower  has  been  exceeded 
when  his  liabilities  exceed  50  per  cent,  of  his  quick  assets  (the  so- 
called  50  per  cent,  credit  rule). 


48      PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

I  [aving  made  a  careful  review  of  the  credit  science  of  to-day, 
let  us  turn  to  a  consideration  of  what  shall  be  the  next  step  in  its 
development.  At  the  outset  we  remarked  that  there  was  a  growing 
requirement  that  bankers  in  large  money  centres  should  be  expert 
in  credit  matters ;  it  is  necessary,  therefore,  that  the  means  or 
mechanism  by  which  we  are  to  inform  ourselves  should  be  kept  fully 
abreast  of  the  times.  Permit  me  to  state  my  conclusion  that  the 
next  step  in  the  development  of  credit  science  will  be  in  the  direction 
of  accuracy.  The  trend  of  every  science  is  toward  exactness.  The 
advance  to  this  point  justifies  a  further  step  in  advance.  Lower 
rates  of  interest  on  loans  make  losses  intolerable.  General  pros- 
perity and  other  conditions  with  which  we  are  familiar  have  limited 
the  field  for  commercial  loans  at  paying  rates  and  require  us  care- 
fully to  safeguard  any  extension  of  the  field  of  loans  by  exact  and 
accurate  credit  tests. 

How  shall  this  next  step  be  taken?  By  establishing  the  custom 
of  requiring  statements  of  financial  condition  to  bear  joint  certifi- 
cates of  a  certified  public  accountant  and  of  an  engineer: — 

i.     As  to  valuation  of  cash  assets. 

2.  As  to  valuation  of  merchandise  assets. 

3.  As  to  valuation  of  plant  assets. 

4.  As  to  liabilities. 

5.  As  to  net  worth. 

6.  As  to  gross  business. 

7.  As  to  past  results  of  business. 

8.  As  to  future  prospects. 

The  certified  public  accountant  has  come  into  prominence  within 
the  last  ten  years  and  his  profession  has  the  guarantee  of  law  in 
most  states  of  the  Union.  He  concerns  himself  with  the  books  of 
account,  and  records  and  statements  prepared  by  him  have  the  sup- 
port of  such  books,  and  the  banker  has  the  sense  of  security  due  to 
the  disinterested  and  impartial  nature  of  the  accountant's  position. 
He  may  be  called  the  referee  in  accountancy  and  the  expert  on  cash 
valuations. 

The  engineer  deals  with  physical  matters.  His  valuation  on 
merchandise  is  essential  in  determining  quick  assets.  He  concerns 
himself  with  the  valuation  of  the  fixed  assets  and  the  adaptibility  of 
the  plant  to  the  purposes  for  which  it  is  being  used.     His  analysis 


GENERAL  BANKING  SECTION  49 

of  all  correlated  questions  respecting  raw  supplies,  vulnerability  to 
competition,  price  fluctuations,  trade,  and  similar  conditions  is 
essential  to  a  right  interpretation  of  statements  of  concerns  affected 
by  such  questions. 

But  why  is  this  radical  step  made  necessary?  Because  inaccu- 
rate and  dishonest  statements  are  being  constantly  received.  Many 
statements  reach  us  which  are  made  by  irresponsible  parties — clerks 
and  under-men — and  the  management  is  frequently  in  ignorance  of 
true  conditions.     Protection  against  such  is  essential. 

The  radicalness  of  the  step  is  only  apparent,  not  real — as  all  will 
be  benefited  by  the  examination  proposed.  The  interpretation  of 
credit  statements  is  a  technical  operation,  and  the  statements  pre- 
pared by  trustworthy  professional  men  are  generally  more  reliable 
than  those  not  so  prepared.  The  hard  and  fast  50  per  cent,  credit 
rule  will  soon  fail,  and  an  exact  and  accurate  study  of  each  individual 
concern  will  take  its  place,  each  concern  being  entitled  to  credit  on 
its  merits.  Working  on  imperfect  information  and  applying  one 
credit  rule  has  resulted  necessarily  in  a  destructive  policy.  Accu- 
racy will  enable  us  to  follow  a  constructive  policy,  which  I  believe 
is  more  nearly  in  accord  with  our  position  in  the  business  world. 

In  brief,  our  next  step  is  in  the  direction  of  accuracy.  This  is 
to  be  accomplished  by  having  statements  subjected  to  searching 
analysis  certified  to  by  certified  public  accountants  and  engineers, 
and  then  credit  will  be  extended  strictly  on  the  merit  of  the  indi- 
vidual applying  for  loans. 

We  are  a  practical  people  who  are  more  given  to  consideration 
of  improving  our  methods  than  to  reflection  upon  our  existing  great- 
ness, or  that  of  our  predecessors.  For  that  reason  I  have  up  to 
this  time  devoted  your  attention  to  progress  in  methods  and  means 
of  credit  research.  I  will  now  turn  your  attention  to  some  practical 
features  of  the  business  we  are  doing  based  on  bank  credits.  I  have 
been  much  interested  in  determining  the  relative  volume  of  bank 
loans  on  commercial  paper  to  the  various  classes  of  borrowers. 
While  this  relation  undoubtedly  fluctuates  widely  it  is  my  conclusion 
that  the  following  statement  reflects  about  the  average  condition : 


50 


PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

Per  cent. 

Commercial  loans  by  banks  to  manufacturers     50 

Commercial  loans  by  banks  to  commission  men   15 

Commercial  loans  by  banks  to  jobbers     30 

Commercial  loans  by  banks  to  retailers     5 


100 

This  was  ascertained  from  the  distribution  of  186  different  loans, 
aggregating-  upwards  of  thirteen  million  dollars.  The  average  dis- 
tribution of  some  sixty  million  dollars  of  loans  placed  through  bro- 
kers in  New  York  gave  the  following  relative  proportions: 

Per  cent. 

Commercial   loans  through  brokers   to  manufacturers    45 

Commercial  loans  through  brokers  to  commission  men   15 

Commercial  loans  through  brokers  to  jobbers   30 

Commercial  loans  through  brokers  to  retailers   10 

100 
The  striking  preponderance  of  loans  from  banks  to  manufactur- 
ers is  evident  from  both  of  these  statements.  It  becomes  of  interest 
to  us,  then,  to  study  further  these  various  classes  of  borrowers,  and 
I  have  prepared  from  the  statements  of  some  one  hundred  concerns 
a  set  of  typical  balance  sheets  that  will  bring  before  us  some  credit 
features,  which  it  will  be  of  profit  to  us  to  study  with  care. 

Typical  balance  sheet  for  manufacturers: 

Number  of  concerns  averaged. 62 

Per  cent. 

Quick    assets    $1,000,000  44 

Fixed    assets    1,270,000  56 


Total    assets    $2,270,000  100 

Liabilities     610,000  27 


Net   worth    $1,660,000  73 

Liabilities  61  per  cent,  of  quick  assets. 

Gross  sales  per  $1  quick  assets   $3-30 

for  44  concerns. 

Gross  sales  per  $1  total  assets   $1.60 

for  44  concerns. 

Typical  balance  sheet  for  commission  men: 

Number  of  concerns  averaged   7 


GENERAL  BANKING  SECTION  51 

Per  cent. 

Quick  assets    $r,ooo,ooo  95 

Fixed  assets     50,000  5 

Total   assets    $1,050,000  100 

Liabilities     520,000  50 

Net   worth    $530,000  50 

Liabilities  52  per  cent,  of  quick  assets. 

Gross  sales  per  $1  quick  assets    $3-6o 

Gross  sales  per  $1  total  assets     345 

Typical  balance  sheet  for  jobbers: 

Number  of  concerns  averaged   28 

Per  cent 

Quick  assets     $1,000,000  00 

Fixed  assets     110,000  10 

Total  assets    1,110,000  100 

Liabilities    440,000  40 

Net   worth    $670,000  60 

Liabilities  44  per  cent  of  quick  assets. 

Gross  sales  per  $1  quick  assets  $2.25 

on  25  concerns. 

Gross  sales  per  $1  total  assets  2.08 

on  25  concerns. 

Typical  balance  sheet  for  retailers : 

Number  of  concerns   averaged    6 

Per  cent. 

Quick  assets    $1,000,000  75 

Fixed  assets   330,000  25 

Total    assets    $1,330,000  100 

Liabilities     480,000  36 

Net    worth    $850,000  64 

Liabilities  48  per  cent,  of  quick  assets. 

Gross  sales  per  $1   quick  assets   $2-33 

on  5  concerns. 

Gross  sales  per  $1  total  assets   $1.82 

on  5  concerns. 

The  exactness  of  these  relations  is  not  important  for  onr  study 
of  the  principles  involved  in  credil  research.     Suffice  it  to  say  that  a 


52 


PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 


study  of  the  several  balance  sheets  will,  I  believe,  disclose  interesting 
comparisons.  It  is  instructive  to  note  in  these  balance  sheets  the 
relative  proportion  of  quick  to  total  assets : 

Per  cent 

Manufacturers  have  quick  assets  of  total  assets  44 

Commission  men  have  quick  assets  of  total  assets  95 

Jobbers  have  quick  assets  of  total  assets   00 

Retailers  have  quick  assets  of  total  assets  75 

What  stronger  argument  could  we  have  for  accuracy  in  our 
credit  methods  than  that  manufacturers,  who  borrow  one-half  the 
money  loaned  on  commercial  paper,  have  56  per  cent,  of  their  assets 
in  such  form  that  we  reject  them  as  unknown  and  unknowable  on 
account  of  our  imperfect  information  and  inability  to  determine  their 
value  ? 

Again,  referring  to  these  balance  sheets,  let  us  compare  the  net 
worth  of  these  classes  of  borrowers : 

Manufacturers  show  net  worth  73  per  cent,  of  their  assets. 

Commission   men  show  net  worth  50  per  cent,  of  their  assets. 

Jobbers  show  net  worth  60  per  cent,  of  their  assets. 

Retailers  show  net  worth  64  per  cent,  of  their  assets. 

From  the  face  of  this  statement  the  manufacturer  maintains  an 
eminently  satisfactory  margin  behind  his  loans,  and  what  we  will 
want  to  know  in  the  future  is  that  this  claimed  margin  is  conserv- 
atively valued. 

Let  us  now  examine  into  the  gross  sales  which  tell  the  tale  of 
the  entire  managerial  activity,  the  mobility  of  the  quick  or  working 
capital : 

Manufacturers,  gross  sales  per  $1  quick  assets  $3.30 

Commission  men,  gross  sales  per  $1  quick  assets    3.60 

Jobbers,  gross  sales  per  $1  quick  assets    2.25 

Retailers,  gross  sales  per  $1  quick  assets    2.33 

Here  we  are  face  to  face  with  the  most  telling  factor  against  a 
hard  and  fast  credit  test,  in  that  the  wide  difference  in  results  in  the 
various  lines  of  business  are  brought  out.  How  can  a  uniform 
credit  test  be  applied  to  such  widely  varying  lines  of  business? 

Of  equal  importance  in  showing  the  variations  in  different  lines 
of  commercial  enterprise  are  the  figures  comparing  the  gross  busi- 
ness done  per  $1  of  total  assets,  representing  as  it  does  the  total 
investment  in  plant  and  working  capital : 


GENERAL  BANKING  SECTION  53 

Manufacturers,  gross  sales  per  $1  total  assets  $1.60 

Commission    men,  gross  sales  per  $1  total  assets     345 

Jobbers,  gross  sales  per  $1  total  assets     2.08 

Retailers,  gross  sales  per  $1  total  assets     1.82 

Becoming  more  specific  in  our  inquiry  we  may  also  come  to  the 
conclusion  that  if  a  uniform  credit  test  fails,  when  applied  to  various 
lines  of  business,  such  as  manufacturing,  jobbing,  etc.,  it  will  also 
fail  when  applied  to  various  branches  of  the  same  line  of  business. 

The  following  figures  taken  from  the  twelfth  census  of  the  United 
States  will  illustrate  the  wide  variations  among  manufacturing 
interests.  In  1900  the  census  report,  covering  the  various  branches 
of  the  manufacturing  division  of  commercial  affairs  showed  a  pro- 
portion of  working  capital  to  total  capital  as  follows : 

Number 

Concerns  Per  Cent. 

Food   products 61,302  Working    cap.  46  Total  cap. 

Textiles     30-048  "  "  54      " 

Iron  and   steel    13,896  "  "  50      " 

Lumber     47,079  "  "  45       " 

Leather     16,989  u  "  72      »        " 

Paper   and   printing    26,747  "  40 

Liquors     7,S6i  41 

Chemicals     5-444  51 

Clay,  glass,  etc 14,809  "  37 

Metals     16.305  "  "  52      "        " 

Tobacco     15,252  "  "  76      u        u 

Vehicles  for  land  trans'n   ...    10,113  "  "  53 

Shipbuilding     1,116  "  "  45      " 

There  will  be  noted  a  fluctuation  from  37  per  cent,  to  76  per  cent, 
and  the  entire  industry  averaged  48.8  per  cent.,  these  variations 
emphasizing  the  futility  of  uniform  credit  tests. 

The  census  report  also  gave  some  interesting  facts  regarding  the 
fluctuations  in  the  gross  business  per  $1  working  capital  and  $1  total 
capital  as  shown  below  : 

Gross  Gross 

Business  Business 

Number                   Per  $i  Per  $i 
Concerns.           Working  Cap.       Total  Cap. 

Food    products 61,302                  $5-22  $2.42 

Textiles    30,048                     2.24  1.20 

Iron  and   steel   13,896                  2.33  M7 

Lumber     47,0/9                    2-4o  109 

Leather     16,989                     2.35  I.71 

Paper  and  printing    26,747                     2.70  1.09 


54   PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

Liquors    7,861  1.96  79 

Chemicals    5,444  2.17  I. II 

Clay,  glass,  etc 14,809  2.28  .83 

Metals    16,305  3-52  183 

Tobacco     15,252  302  2.28 

Vehicles   for   land   trans'n...  10,113  2.42  1.21 

Shipbuilding    1,116  2.14  -97 

Average    $2.70  $1.32 

Observing  this,  it  will  be  noted  that  the  gross  business  per  $1  of 
working  capital  varied  from  $1.96  to  $5.22.  The  gross  business  per 
$1  of  total  capital  varied  from  79  cents  to  $2.42.  Does  this  not 
further  emphasize  the  fact  that  lines  of  business  should  be  judged 
strictly  on  their  individual  merits,  rather  than  by  hard  and  fast  rules? 

It  Would  be  interesting,  if  we  had  time,  to  compare  many  of  the 
branches  of  these  industries  which  vary  even  more  widely  than  the 
grand  division  of  manufacturers.  Every  consideration  seems  to 
impress  the  fact  that  one  of  the  cardinal  and  fundamental  principles 
of  credit  science  must  be  accuracy  in  all  the  term  implies.  This 
forces  us  to  the  conclusion  that  the  50  per  cent,  credit  rule  as  regards 
quick  assets  to  liabilities  will  not  long  be  the  chief  factor  in  fixing 
upon  the  responsibility  of  borrowers  in  the  light  of  the  wide  varia- 
tion among  the  various  classes  enumerated.  The  time  is  coming 
when  we  shall  be  compelled  to  secure  information  which  is  accurate 
and  reliable,  and  which  has  behind  it  the  weight  of  certification  and 
proof. 

As  to  the  future :  We  are  naturally  looking  forward  to  extending 
commercial  loans  at  paying  rates  of  interest.  Inasmuch  as  loans 
which  are  secured  by  assets  not  readily  convertible  into  cash,  are 
those  which  are  subject  to  higher  rates,  it  seems  probable  that  the 
field  of  the  manufactures,  now  representing  fully  one-half  of  the 
loans  direct  from  banks,  is  entitled  to  the  most  careful  consideration 
in  the  study  of  bank  credits,  and  is  of  such  importance  as  to  demand 
of  us  intelligent  examination  and  scientific  treatment. 

The  manufacturers  of  the  United  States,  numbering  upwards 
of  500,000  concerns,  have  a  gross  business  of,  probably,  $13,000,000,- 
000,  requiring  an  investment  in  plant  and  working  capital  of  $10,- 
000,000,000,  the  working  capital  being  something  under  $500,000,000 
— a  volume  of  business  and  extent  of  investment  which  is  stupendous 
in  the  extreme.     The  manufacturer  is  essentially  the  prime  mover 


GENERAL  BANKING  SECTION 


55 


of  commerce,  and  has  to  carry  a  large  investment  in  plant  and 
machinery.  Invention  and  improvement  of  machinery  and  products 
are  continuous,  thus  making  large  inroads  into  his  sinking  fund  for 
renewals  and  scrapped  machinery.  He  must  maintain  large  stocks 
of  raw  material  and  be  secure  in  the  continuity  of  his  supplies.  He 
must  carry  large  values  of  goods  in  process.  He  must  risk  the 
fluctuations  in  the  cost  of  raw  materials  and  sales  value  of  his  finished 
goods.  He  must  take  chances  on  changes  in  style  and  be  at  the 
mercy  of  the  caprice  of  fashion.  All  of  these  considerations  should 
lead  us  to  count  upon  the  manufacturer  as  substantial,  conservative, 
keen  after  business,  acute  for  economies ;  and  the  extent  of  his 
investment  should  give  him  such  an  intense  personal  interest  in  his 
enterprise  that  we  should  expect  to  find  him  the  most  promising  of 
our  applicants  for  loans.  But  to  handle  this  business  safely  and 
wisely  demands  accuracy  in  our  credit  methods. 

In  conclusion,  permit  me  to  say  that  credit  science  occupies  a 
prominent  place  in  commercial  affairs.  The  requirement  of  credit 
is  a  proper  and  necessary  condition  of  business,  and  the  usefulness 
of  credit  is  firmly  established.  Every  consideration  demands  of  us 
that  as  this  science  develops  it  shall  be  firmly  established  in  all 
respects  upon  substantial  principles,  and  that  as  its  rules  and  customs 
are  unfolded  from  time  to  time  they  shall  serve  to  strengthen  jointly 
the  bank  in  extending  credit  and  the  borrower  in  taking  advantage 
of  the  credit.  It  will  require  joint  and  harmonious  action  on  the 
part  of  all  interested  in  bank  credits  to  successfully  accomplish  the 
forward  step  which  has  been  outlined  in  these  remarks,  but  if  this  is 
accomplished,  judging  from  our  experiences  in  the  past,  the  results 
will  be  of  surpassing  value  to  the  entire  commercial  community. 
Let  us  restate,  then,  the  principal  facts  regarding  this  advanced  step: 

i.     It  shall  be  in  the  direction  of  accuracy. 

2.  Statements  of  condition  shall  be  required  of  borrowers  bear- 
ing the  certificate  of  certified  public  accountants  and  of  engineers. 

3.  Statements  of  condition  shall  be  invariably  analyzed  faith- 
fully and  accurately,  and  with  all  the  thoroughness,  weight  of 
experience,  and  knowledge  which  can  be  brought  to  bear  upon  them 
by  our  best  organization  and  equipment. 


:  LEMS  IN  5  ;  AND  CURRENCY 

KNK  AUDI!  - 

AMBSSS    DCUVntED   BY    SEYVOrS    WAI  HaNAX. 

un  Devoa,  :  befoke  te-  ns1 

-   -  rong  as  g  -  :  .         hrersc   is 

the  :  ::tal  world.     Men  are  con- 

running  into  gr  ts  in  -     whether 

al,  religious,  or  c  -      7".:  -    -  -     :  .       true     :  their  business 

-  and  arises  p:.  time,  partly  from  disinclina- 

tion to  exert  then  -   and  verj    ::ten  from  lade  sdge  of 

g      :ore  desira     ..     '.V      .        . -.    Eacts   ire  true  of  persons 
engaged  in  any  bos  ire  especially  s  r.g  pro- 

fession.    The        -  :  .   that  of  another  that  the 

tendenc  EaD  into  re  s  almost  irres    :.ble,  and  : 

seen:-  r  n        oportur  I  r  for     rig         :        Yd  there   are 

placr  riginalil  eeded  and  where  a  proper  use  of 

s  more  v.  in  behind  the  counter     :   a  bank.     The 

in  most  banks,  es'       dry  in  the  large  ci:         is  that 
:  is  so  cons  he  has  no  time  to  develop 

•If  he  has  the  foundation  for  them.     He  is  too  busy  to 

-  : :  -  "r  a  way  as  to  discover 

the  evidenc  es  of  irreg  would  seem  to  have 

beer.  ipparent,  jucL  :  light       after  events     >r  to  make 

trie  proper  regard  tc  the  real  condition  of  its  custom- 

n  if  he  knows  that  a  careful  their  accounts  will 

Eacts.     7:~  ~.ce,  he  does  not  take 

•- -:   :::■;':'.:    : .     .-:.-".       :   -   r.i:.   -.'.-...-       .        •:  rr.er's    yearly 

sale?  t  of  hi-  :  movement  during  the  same  time. 

"-here  is  no  more  valuable  infc  -  -fgard  to  a  borrowing 

-  total  deposits,  excluding 

.    -  .     -     . -.       nsadei  in  excess  of  his  total  sales. 

I  -    •  :    terns 

that   are  of  a  »      itnr       -     flier  rgitimate.     It   is   far 

er  for  the  credit  man   ::"  the  bank  to  make  a  few  preliminary 
inve  accept  tstomer's  owr  I  of  his  net  worth, 

a.  line  of  credit  and  then  drop  quietly  and  easily  into  a  rut 
and  stay  there  until  he  is  rue-  -tied  out  of  it  by  a  bankruptcy 

notice. 


GENERAL  BANKING  SECTION  :- 

In  the   same  way  the  officers  of  a  bank  acquire  the  habit  of 
implicitly  trusting  th    -  and  their  fellow-  Eac 

of  them,  working  in  a  particular  gro  xra  becomt: 

fied  if  his  own  department  is  corrt  :hy  handled,  and  pays  no  aJ 
tion  to  any  one  else,  excep:  groove  -neet  or 

-     s  that  of  another.     As  long  as         r  -      -       - 

to  meet  the  requir  -  of  his  own  particular  balance,  he  pa 

attention  to  how  the  adjustment  'ected.     In  the  nature  of  th 

he  cannot  be  expected  to  concern  himself  v  ng  e  of 

his  own  depar:  and  certainly  is  not  called  upon  to 

the  intricacies  of  his  neighb >r  Iproi  But    t 

habit  of  confining  each  man  to  hi-  ar  rut  that  oh  rs 

opportunity  for  the  misapplication  of  :      Is 
a  man  too  weak  to  resist   it.     Some  ba  tfempt  to  :' 

difficulty  by  a  constant  exchange  of  c  :n  the  part 

working    force.     This  plan   unquestionh. .      :i':.- 
their  grooves  and  is  an  absolute  preventive  of  trouble,  bv.:    :    -  :pen 
to  the  objection  that  c  -    io  not  like  to  deal 

persons  when  they  have  become  accustomed  to  having  theii 
satisfactorily  looked  after  by  those  who  know    and  respec:   I 
various   peculiarities.     Other   institutions  have   a    E  rk  or 

auditor  whose  du:         5  to  check  up  each  departme:  :he  auditor 

himself  is  liable  to  get  into  a  groove  and  to  perform  his  duties  in  a 
perfunctory  manner.     He  is  also  subject  to  limit  -      hen  the 

irregularity  that  he  may  detect  is  the  work  of  an  officer  of  the  : 
whom  he  does  not  dare  to  criticise  unless   the   fault  has  already 
amounted  to  criminality.     The  only  other  protection  c  nployed 

by  the  majority  of  banks  is  afforded  by  the  infreque: 
official  examiner,  whose  time  is  too  limited  and  whose  examination 
is  too  superficial  to  detect  any  but  the  most  glaring  irregularities.  As 
loner  a^  the  banking  law  is  obeyed  as  to  the  reserve,  the  io  per  cent, 
limitation  on  loans,  and  other  specific  legal  demands  are  satisfactorily 
met.  his  duty  is  fulfilled.  Any  ordinary  well-covered  irregular- 
sure  to  escape  his  attention  and  he  should  not  be  blamed  if  it  does.  It 
is  the  duty  of  the  directors  to  see  that  the  officers  are  properly  dis- 
charging the  functions  of  their  respective  positions  and  of  the  officers 
to  supervise  properly  the  work  of  the  employees.  It  would  be  diffi- 
cult to  find  a  case  in  banking  history  where  a  defalcation  would  not 


58   PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

have  been  prevented  if  all  the  officers  had  been  properly  alert  in 
their  attention  to  facts  whose  significance  became  apparent  after  the 
discovery  of  the  shortage,  but  which  had  been  overlooked  in  the 
hurry  of  daily  work  or  ignored  because  the  surface  routine  had  not 
been  disturbed  by  the  malign  forces  at  work  underneath. 

It  is  hardly  fair  to  blame  very  seriously  the  bank  officers  for 
their  neglect  to  cover  all  the  points  at  which  an  attack  may  be  made 
on  the  defences  of  the  bank  against  manipulation  of  the  accounts. 
They  have  usually  enough  to  do  to  protect  themselves  from  assault 
by  outside  enemies,  the  danger  from  which  is  more  apparent  and 
also  more  frequent  than  that  from  traitors  inside  their  own  walls. 
Constant  intercourse  with  their  daily  associates  makes  the  idea  of 
any  treachery  on  their  part  almost  an  unthinkable  proposition.  The 
universal  exclamation  when  the  wrong  is  discovered  is :  "I  would 
as  soon  have  thought  of  suspecting  myself."  It  is  natural  that  this 
condition  should  exist,  and  it  would  be  a  very  unfortunate  thing  if 
this  mutual  confidence  and  esteem  were  broken  up  and  each  man  in 
a  bank  were  to  be  an  Ishmael  with  "his  hand  against  every  man,  and 
every  man's  hand  against  him."  Each  would  feel  that  his  neighbor 
was  a  spy,  and  every  little  suspicious  circumstance  would  be  exag- 
gerated into  a  crime.  Yet  between  this  impossible  condition  and 
the  indifference  which  results  from  the  inertia  of  the  routine  habit, 
there  seems  no  middle  course  possible  to  those  inside  the  walls  of 
the  bank. 

We  are,  then,  forced  to  the  conclusion  that,  if  any  remedy  is  to 
be  found,  it  must  be  looked  for  outside  the  bank  itself.  The  present 
Comptroller  of  the  Currency  has  already  suggested  this  in  his  able 
address  to  the  Illinois  bankers  last  October,  in  which  he  said:  "In 
addition  to  such  exhibitions  as  are  made  at  regular  meetings,  the 
directors  should  have  frequent  thorough  examinations  by  com- 
mittees of  the  board  or  experts  employed  for  the  purpose.  These 
should  be  made  independently  of  the  active  officers  of  the  bank. 
Every  clerk  and  every  officer  of  the  bank  should  be  examined  and 
checked  up  as  thoroughly  as  possible,  and  required  to  show  the  ex- 
amining committee  or  auditor  just  how  the  matters  in  his  charge 
stand.  No  man  who  is  in  a  position  of  trust  has  any  right  to  resent 
such  examination,  and  one  who  has  a  proper  appreciation  of  the 
relation  he  bears  to  those  who  have  reposed  trust  and  confidence 


GENERAL  BANKING  SECTION  59 

in  him  will  welcome  such  an  opportunity  to  show  that  he  has  been 
faithful  and  efficient."  With  such  high  authority  in  favor  of  the 
outside  auditor  no  argument  should  be  needed  to  demonstrate  his 
value. 

A  word  may  be  said  about  the  auditing  committee  of  the  board 
of  directors.  In  connection  with  the  value  of  the  contents  of  the 
portfolio  their  advice  is  probably  the  best  obtainable.  They  are  in 
a  position  to  know  the  financial  condition  of  their  borrowing  custom- 
ers, as  well  as  it  can  be  ascertained  in  any  way,  except  by  requiring 
periodical  statements  made  by  an  outside  trained  accountant.  But 
when  it  comes  to  the  intricacies  of  the  accounts,  it  is  a  rare  thing  to 
find  on  the  board  of  any  bank  a  director  who  is  qualified  by  expe- 
rience to  understand  them  sufficiently  to  detect  any  but  the  most 
glaring  irregularities.  The  ordinary  board  of  directors  is  composed 
of  busy  men  who  have  time  to  give  only  the  most  cursory  attention 
to  the  affairs  of  the  bank.  The  officers  and  clerks  have  grown  up, 
perhaps,  from  boyhood  under  their  eyes,  and  for  many  long  years 
have  faithfully  executed  the  trust  confided  to  them.  It  is  no  wonder 
that  the  directors  learn  to  rely  upon  them  implicitly,  even  to  the 
extent  of  refusing  to  appoint  an  examining  committee  when 
requested  to  do  so  by  some  officer  who  desires  to  force  them  into 
taking  their  just  share  in  the  responsibility  of  the  active  manage- 
ment. With  the  directors  deep  in  the  rut  of  absolute  confidence  in 
the  officers  and  the  officers  equally  deep  in  their  rut  of  perfect 
reliance  on  the  clerks,  it  is  easy  for  a  designing  man  to  find  an 
opportunity  to  take  advantage  of  the  situation,  knowing  that  he  will 
be  secure  as  long  as  he  does  not  allow  any  of  his  operations  to 
encroach  on  any  one  else's  particular  rut. 

In  such  a  condition  of  affairs,  not  by  any  means  an  uncommon 
condition,  as  every  banker  knows,  there  would  seem  to  be  no  pos- 
sibility of  protecting  the  bank  from  the  unlooked  for  traitor  by  any 
means  now  in  common  use.  The  profession  which  I  represent  asks 
you  to  consider  the  claim  of  the  certified  public  accountant  to  be  the 
best  person  to  offer  protection  to  the  bank,  as  he  has  for  years  sue- 
fully  given  it  to  the  merchant  and  manufacturer. 
It  is  only  within  the  last  few  years  that  the  profession  of  the 
public  accountant  has  been  brought  into  prominence,  and  it  is  still 
not  so  well  understood  as  it  should  be  by  those  to  whom  his  services 


60   PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

are  of  value.  He  is  a  man  whose  training  is  entirely  along  the 
lines  of  the  scientific  investigation  of  accounts,  which  is  a  very 
different  thing  from  the  mere  certification  of  their  mechanical 
accuracy.  A  number  of  the  states  have  recognized  the  new  profes- 
sion by  passing  laws  allowing  the  title  of  certified  public  accountants 
to  be  borne  only  by  those  who  arc  able  by  long  experience  or  by 
passing  a  severe  examination  to  demonstrate  their  fitness  for  the 
work  required  of  them.  As  their  clients  are  found  in  all  lines  of 
business  they  are  constantly  brought  in  touch  with  an  infinite  variety 
of  accounts  and  are,  therefore,  in  little  danger  of  falling  into  ruts 
or  grooves ;  and  being  independent  of  any  special  influence  they  are 
not  liable  to  favor  even  the  higher  officials  if  there  is  anything  that 
needs  criticism  or  reform.  Their  training  teaches  them  to  simplify 
accounts  as  far  as  possible,  and  at  the  same  time  to  make  all  the 
departments  of  an  office  fit  into  each  other  so  as  to  make  a  harmo- 
nious whole,  each  part  so  closely  related  to  every  other  that  an 
irregularity  in  one  place  will  throw  the  machinery  in  another  out  of 
gear.  They  may  be  said  to  put  interlocking  switches  at  the  points 
where  one  groove  crosses  another,  which  will  to  a  certain  extent 
automatically  prevent  trouble  in  either. 

It  is  difficult  to  formulate  a  universal  system  applicable  to  all 
officers,  even  in  the  same  line  of  business,  and,  while  banking 
accounts  are  as  simple  as  any,  no  one  institution  is  so  precisely  like 
another  that  it  would  be  safe  to  say  that  the  same  methods  would 
exactly  fit  all  cases.  Each  individual  bank  must  be  studied  to 
ascertain  just  what  its  particular  needs  are,  and  how  best  to  meet 
them.  And  where  loose  and  slip-shod  habits  have  been  broken  up, 
there  must  be  constant  vigilance  to  prevent  their  return  or  the  adop- 
tion of  equally  dangerous  new  ones.  The  contention  of  the  public 
accountants  is  that  the  most  effective  vigilance  can  be  exercised  by 
those  who  are  fitted  by  their  whole  training  to  discover  and  remedy 
flaws  in  methods,  and  who  approach  the  task  of  a  periodic  audit 
with  minds  free  from  prejudice  or  bias,  and  with  sufficient  time  at 
their  disposal  to  give  the  subject  the  attention  it  deserves. 

The  saying  that  each  man  thinks  all  men  mortal  but  himself  can 
be  paralleled  by  the  virtual  certainty  each  banker  has  that  his  partic- 
ular office  contains  none  but  men  of  the  most  sterling  integrity. 
Each  one  thinks  that  auditing  precautions  are  excellent  for  every 


GENERAL  BANKING  SECTION  6l 

bank  but  his  own,  but  is  so  sure  of  his  own  associates  that  he  does 
not  need  anything  of  the  kind  himself.  To  the  credit  of  human 
nature  it  may  be  said  that  he  is  usually  right.  The  vast  majority  of 
men  are  honest.  If  it  were  not  so,  the  record  of  financial  delinquen- 
cies would  be  far  longer  than  it  is,  for  there  is  no  question  but  that 
the  opportunities  for  wrong-doing  are  almost  limitless.  The  honest 
man,  however,  does  not  object  to  a  proper  supervision  of  his  work, 
and  should  welcome  it  as  a  protection  against  the  weakness  of  his 
own  human  nature.  For  nearly  every  case  of  shortage  is  accurately 
described  by  the  phrase,  "A  good  man  gone  wrong."  It  is  very 
seldom  a  case  of  deliberate  dishonesty.  The  man  is  usually  a  really 
good  man  in  his  intentions  and  his  natural  tendencies,  but  he  is 
weak  and  unable  to  stand  the  temptation  that  comes  in  subtle  guise 
when  he  thinks  he  sees  an  absolutely  sure  way  to  make  considerable 
sums  if  he  only  had  sufficient  capital  to  start  with.  He  is  so  sure  of 
his  calculations  that  he  feels  justified  in  temporarily  using  the  funds 
of  others,  expecting  to  return  them  in  a  short  time,  after  having 
caused  them  to  earn  a  fortune  of  more  or  less  magnitude  for  him- 
self. It  can  never  be  known  how  many  men  have  been  successful 
in  these  calculations  and  have  since  returned  to  the  straight  and  nar- 
row path.  We  hear  only  of  the  failures,  and  not  all  of  them,  for 
a  very  considerable  proportion  are  hushed  up  for  fear  of  the  dis- 
astrous effects  on  the  credit  of  the  bank. 

As  a  means  of  justifying  the  confidence  of  the  general  public  in 
the  correct  management  of  the  bank  it  would  be  a  great  advantage 
to  have  it  known  that  it  has  adopted  the  precaution  of  having  a 
thorough  examination  made  by  an  unprejudiced  and  competent 
accountant.  If  this  certificate,  worded  in  general  terms,  were  exhib- 
ited in  the  public  banking  room,  and  with  it  there  appeared  another 
certificate  signed  by  a  committee  of  the  directors,  or  better  still  by  a 
committee  of  stockholders,  not  officially  connected  with  the  bank, 
that  they  had  examined  the  discounted  paper  on  hand  and  had  con- 
sidered it  good,  the  confidence  engendered  by  the  willingness  to  sub- 
mit to  this  test  would  probably  far  more  than  pay  for  the  expense 
of  the  examination  by  the  additional  business  it  would  bring  to 
the  bank.  This  plan  would  also  have  a  good  effect  on  the  directors 
themselves,  who  might  be  prevented  from  making  some  question- 
able loan  for  fear  it  would  not  pass  the  scrutiny  of  the  committee, 


62       PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

and  would  certainly  have  a  deterrent  effect  on  the  conduct  of  those 
hank  officials  whose  directors  allow  them  to  have  full  control  of  the 
management  of  the  bank. 

The  professional  accountants  of  the  country  commend  the  sub- 
ject to  the  careful  attention  of  the  banks,  confident  that  a  proper 
study  of  the  situation  will  develop  plans  that  will  render  less  frequent 
the  distressing  occurrences  that  have  recently  shocked  the  financial 
world. 


SECURITIES  THAT  ARE  NOT  SECURITIES 

ADDRESS    DELIVERED    BY    J.    T.    BRADLEY,    CASHIER,    FIRST    NATIONAL    BANK,    SEDAN, 
KANSAS,  BEFORE  THE    KANSAS   BANKERS'    ASSOCIATION,    IOX>5. 

This  subject  suggests  two  general  classes  of  security:  First,  that 
which  is  security  and,  second,  that  which  is  not  security.  By  secur- 
ity is  meant  any  kind  of  property,  thing,  right,  privilege,  franchise, 
service,  person,  corporate  body,  or  municipality,  pledged  to  the  pay- 
ment of  an  obligation,  or  debt,  or  to  a  performance.  Any  pledge 
made  which  causes  the  fulfillment  of  a  thing  to  be  done  at  the  time 
and  in  the  manner  specified  in  an  agreement  or  contract  is  security 
that  secures.  If  it  fails  to  cause  the  fulfillment  of  the  obligation, 
agreement,  or  contract  in  the  manner  or  at  the  time  specified,  or 
within  a  reasonable  time  thereafter,  or  at  all,  it  is  security  that  does 
not  secure. 

To  be  specific :  Any  note,  bond,  warrant,  order,  draft,  or  other 
evidence  of  indebtedness,  which  is  secured  by  a  person,  corporation, 
or  municipality,  or  by  a  pledge  of  property  of  any  kind  or  character, 
which  insures  prompt  payment  or  fulfillment,  is  security  that  secures ; 
if  it  fails  to  secure  payment  or  fulfillment  promptly  or  within  a 
reasonable  time  or  at  all,  then  it  is  not  security. 

It  is  not  the  principal  note,  bond,  mortgage,  order,  warrant,  or 
other  evidence  of  indebtedness  that  is  the  thing  of  value,  but  that 
which  stands  behind — as  the  money  to  be  paid,  the  service  to  be  per- 
formed, the  right  or  privilege  to  be  granted,  the  property  to  be 
transferred,  and  it  is  to  cause  these  performances  that  security  is 
taken.     It  is  a  fact  that  security  which  secures  at  one  time  or  under 


GENERAL  BANKING  SECTION  63 

certain  conditions  will  not  secure  at  other  times  and  under  different 
conditions.  Growing  crops  are  a  good  example  of  this.  Stocks  in 
corporations  which  under  good  management  and  under  certain  con- 
ditions would  secure,  under  poor  management  or  under  unfavorable 
conditions  would  be  no  security  at  all.  Security  that  is  "gilt  edge" 
when  first  taken  may  become  worthless  during  the  term  for  which 
pledged ;  and  security  which  does  not  secure  when  taken  may 
become  good  before  the  maturity  of  the  obligation. 

Security  may  be  individual,  or  may  consist  of  property  pledged 
direct,  or  may  consist  of  other  securities.  When  security  is  indi- 
vidual, not  only  all  the  property  of  the  signer,  but  honor  as  well  is 
pledged ;  but  the  pledge  is  general  and  gives  no  preference  to 
creditors.  When  there  is  a  specific  pledge  of  property  as  security, 
a  legal  agreement  to  that  effect  must  be  executed  which  holds  the 
specific  property  pledged  to  the  payment  of  the  particular  debt, 
obligation,  or  performance ;  in  which  case  the  property  may  be  left 
in  custody  of  pledger  for  the  benefit  of  the  pledgee;  or  other 
securities  may  be  pledged,  in  which  case  possession,  but  not  owner- 
ship, changes  hands. 

The  selection  of  persons,  property,  and  other  securities  that  will 
secure  and  the  rejection  of  such  as  will  not  secure  the  performance 
desired  is  the  quality  necessary  to  the  money  lender.  It  can  be 
readily  seen  that  an  intimate  knowledge  of  the  present  and  future 
value  of  property  and  securities  and  a  sound  judgment  of  the  char- 
acter of  men  is  essential.  When  one  or  more  names  are  accepted 
to  secure  the  payment  of  an  obligation,  it  is  necessary  to  know  that 
the  persons  are  honorable  and  have  the  disposition  and  ability  to 
pay. 

There  is  a  moral  as  well  as  a  physical  element  to  be  considered 
in  the  loaning  of  money,  and  generally  the  moral  element  is  para- 
mount. Different  communities  have  to  deal  with  different  securities. 
In  Kansas  the  usual  kinds  are  land,  city  lots,  and  occasionally  the 
appurtenances  to  real  estate,  apart  from  the  real  estate;  growing 
crops,  rough  feed,  grain,  elevator  and  warehouse  receipts,  bills  of 
lading,  live  stock,  poultry,  produce,  stocks,  bonds,  notes,  contracts, 
leases,  order-,  warrants,  certificates  of  deposit,  insurance,  products 
of  mines,  implements,  machinery,  furniture,  merchandise,  libraries, 
jewelry,  personal  service,  rents,  and  perhaps  others.     Much  of  the 


U4   PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

property  named  is  unfit  for  security,  but  all  of  it  has  been  accepted. 
In  deciding  what  security  does  not  secure,  certain  well-known  rules 
should  be  followed: 

First — Security  should  be  a  definitely  known  quantity. 

Second — It    should   be   readily   convertible  into   cash. 

Third — It  should  be  legally  pledged. 

Fourth — The   pledger's  title  should   be   unquestionable. 

Fifth — It  should  secure  a  specific  debt. 

Sixth — It  should  be  so  accurately  described  as  not  to  be  mistaken. 

Seventh — It  should  have  sufficient  value  to  cover  the  indebted- 
ness, probable  expenses  of  collection,  all  contingent  charges  against 
it,  and  reasonable  depreciation. 

Eight — Security  left  in  the  possession  of  the  pledger  should  be 
definitely  located. 

Ninth — The  pledger's  character  for  integrity,  prudence,  industry, 
and  ability  should  be  favorable. 

Applying  these  rules  to  the  various  classes  of  property  mentioned, 
we  can  eliminate  that  which  is  undesirable  as  security  and  which 
will  probably  not  secure. 

We  discard  all  stocks  of  corporations  whose  capital  consists  of 
the  prospective  value  of  undeveloped  property,  or  which  has  no 
present  value,  and  that  in  unprofitable  enterprises ;  growing  crops, 
machinery  in  abandoned  mills  and  failed  enterprises,  and  that  which 
is  worn  out  or  out  of  date,  insurance  polices  having  no  cash  surrender 
value,  real  estate  having  defective  title  and,  generally,  second  mort- 
gages, especially  on  personal  property ;  bonds  and  stocks  that  have 
no  market  value,  stocks  of  merchandise,  unless  the  owner  is  free  from 
debt  or  provision  is  made  for  payment  and  immediate  possession  is 
taken,  household  furniture  needed  for  family  use,  past  due  notes, 
unless  it  is  known  there  are  no  offsets ;  notes  running  a  much  longer 
time  than  the  principal  debt,  all  impractical  machinery,  grain  and 
feed  for  the  sustenance  of  live  stock,  unless  included  with  the  stock ; 
libraries,  perishable  products,  part  of  a  herd  of  live  stock  of  the 
same  description,  unless  specifically  marked  or  separated  from  the 
herd ;  grain  elevators,  unless  well  located  and  at  a  low  valuation ;  one 
animal,  leases  providing  for  a  share  of  production  as  the  rental ; 
usually  security  which  may  be  good,  but  which  is  remote  and  not 
known  to  the  pledgee ;  persons  in  bad  repute,  known  to  be  tricky  and 


GENERAL  BANKING  SECTION  65 

dishonest  in  business ;  persons  engaged  in  business  they  know  noth- 
ing about,  where  all  their  means  are  invested  in  the  business,  and 
persons  without  means,  wishing  to  borrow  for  investment.  Con- 
tracts are  doubtful  quantities  and  should  rarely  be  accepted  as 
security,  excepting  in  case  of  contracts  for  sale  of  property  taken 
for  debts,  where  the  property  remains  in  possession  of  the  seller. 

It  is  not  intended  to  advise  the  rejection  of  all  items  on  the  fore- 
going list  as  security  under  all  circumstances,  but  in  making  original 
loans  it  is  strongly  recommended.  It  sometimes  becomes  necessary 
in  renewals  to  take  the  best  that  can  be  had,  and  in  such  cases  it  is 
prudent  to  take  anything,  present  or  prospective,  that  holds  out  a 
promise.  Eternal  vigilance  should  be  practiced  at  all  times  to  see 
that  the  mortgage  or  collateral  contract  does  not  lapse.  Many  a 
well  secured  loan  has  been  lost  by  negligence  of  this  kind,  and  when, 
too  late,  discovery  has  been  made  that  the  security  did  not  secure. 
An  endorser  for  value  should  not  be  accepted  without  a  waiver  of 
protest.  If  protest  is  not  made  on  day  of  maturity,  unless  it  is 
waived  or  other  notice  of  non-payment  is  given,  the  endorser  is 
released.  In  case  of  an  endorser  as  surety,  never  make  a  renewal 
without  his  written  consent,  and  to  avoid  all  mistakes  of  this  kind, 
take  a  new  note.  It  is  necessary  to  have  all  parties  join  in  a  new 
contract,  else  the  ones  who  do  not  are  released  on  the  original. 

A  case  like  the  following  one  was  once  tried  in  the  district  court 
of  Chautauqua  County,  Kansas:  A  took  a  note  from  B,  with  C  as 
surety.  A  bought  D's  cattle  and  offered  the  note  in  part  payment. 
D  agreed  to  accept  it  if  A  would  get  another  signed  by  D;  which 
was  done.  A  then  endorsed  and  delivered  the  note  to  D.  Before 
maturity  A  bought  it  back  and  after  maturity  sued  B  and  C  in 
default  of  payment,  but  did  not  make  the  additional  endorsement 
obtained  at  D's  request  a  party.  The  court  refused  judgment  on  the 
note  on  the  ground  that  it  was  not  the  same  instrument  he  accepted 
from  B,  having  been  changed  by  the  additional  name  without  the 
knowledge  or  consent  of  B  and  C.  This  is  a  case  where  security 
did  not  secure 

The  most   fruitful  source  of  bad  paper  is  the  practice  of  over- 
loaning  and  permitting  numerous  renewals.     Both  have  a  tendency, 
in  the  process  of  evolution,  toward  an  exhaustion  of  security  before 
the  debt  is  paid.     The  fact  is  that  some  men  have  the  capacity  for 
5 


66   PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

large  things,  and  some  have  not.  If  a  person  who  has  not,  but 
thinks  he  has,  can  find  a  banker  who  does  not  know  whether  he  has 
or  not,  but  is  willing  to  chance  it,  the  foundation  is  laid  for  a  good- 
sized  loss.  This  is  a  good  time  to  suggest  the  question :  Are  bank- 
ers justified  in  making  excess  loans  or  numerously  repeated  renew- 
als? The  latter  is  equivalent  to  making  an  investment  in  the  bor- 
rower's business,  instead  of  lending  him  money.  Ultimately  the 
practice  is  detrimental  to  both  bank  and  customer. 


REQUISITES  OF  A  GOOD  LOAN 

ADDRESS  DELIVERED  BY  E.  T.  COMAN,  CASHIER  OF  THE  FIRST  NATIONAL  BANK, 
COLFAX,  WASHINGTON,  BEFORE  THE  WASHINGTON  BANKERS'  ASSOCIATION  AT 
WALLA    WALLA,    JUNE,    IQX>4. 

The  question,  "What  constitutes  a  good  loan  ?"  is  one  that  comes 
to  every  banker  many  times  each  day.  Upon  its  correct  answer, 
made  on  the  spur  of  the  moment,  lies  the  secret  of  success  or  failure 
of  the  bank  entrusted  to  the  care  of  the  person  to  whom  this  question 
is  put.  This  responsibility  is  one  that  cannot  be  shifted  easily  to 
another,  as  the  knowledge  of  men  and  conditions  essential  to  the 
correct  answer  is  acquired  by  years  of  study  of  business  and  of 
individuals.  To  the  man  who  can  invariably  give  the  correct  answer 
to  the  application  for  accommodation,  there  is  open  a  place  behind 
the  executive  desk  of  the  largest  financial  institutions  of  the  world. 
It  is  as  important  to  have  said  "yes"  when  the  applicant  was  entitled 
to  credit  as  it  is  to  have  said  "no"  when  the  granting  of  credit 
involved  the  probability  of  a  loss.  The  banker  exercises  no 
arbitrary  discretion  when  he  extends  or  refuses  accommodation  to 
the  borrower.  Within  certain,  perhaps  not  too  well  defined  lines, 
he  is  the  servant  of  the  public,  rather  than  the  autocrat,  which  is 
sometimes  popularly  supposed  to  represent  the  ideal  of  a  banker. 
In  no  department  of  its  utilities  is  the  business  of  a  bank  to  be 
increased  so  surely  or  so  fast  as  in  the  judicious  granting  of  credit 
to  those  justly  entitled  thereto.  While  it  is  popularly  called 
"accommodation"  when  a  banker  extends  credit  to  an  applicant, 
yet  the  accommodation  is  mutual  if  the  conditions  are  right.     For 


GENERAL  BANKING  SECTION  67 

a  banker  to  refuse  a  loan  to  a  customer  who  is  entitled  to  it  by  rea- 
son of  his  responsibility  and  his  account  in  the  bank,  is  to  fail  to 
fulfill  his  function  as  a  part  of  the  commercial  life  of  his  community 
and  to  make  public  acknowledgment  that  there  is  weakness  some- 
where in  the  management  of  his  institution.  To  be  subject  to  such 
an  arraignment,  it  must  be  an  unqualifiedly  good  loan  that  is  turned 
down. 

If  each  banker  here  were  to  be  asked  the  question,  "What  con- 
stitutes a  good  loan  ?"  it  is  likely  that  there  would  be  almost  as  many 
different  answers  as  there  are  members  assembled,  each  differing 
according  to  environment  and  experience.  Says  one,  "A  good  loan 
is  one  secured  on  United  States  bonds  as  collateral  with  a  reasonable 
margin  for  shrinkage."  That  would  indisputably  be  a  good  loan ; 
but  unfortunately  not  all  of  the  collateral  that  is  presented  to  the 
cashier's  window  consists  of  government  bonds  alone,  but  is  apt 
to  be  what  Wall  Street  denominates  mixed  collateral. 

Among  the  bankers  of  Iowa,  Missouri,  Kansas,  and  Nebraska 
no  paper  is  considered  so  choice  as  that  offered  by  the  cattle  feeder. 
These  bankers  do  not  hesitate  to  advance  the  entire  purchase  price 
of  a  bunch  of  steers,  provided  the  applicant  for  the  loan  has  the  corn 
with  which  to  make  them  beef;  the  prudent  practice  being  to  take  a 
blanket  mortgage  on  both  corn  and  cattle.  The  competition  to 
secure  such  paper  has  reduced  the  rate  of  interest  to  the  lowest 
profitable  basis,  and  brokerage  firms  have  been  established  for  the 
sole  purpose  of  floating  this  class  of  paper.  The  dangers  of  over- 
competition  in  luring  bankers  away  from  cautious,  conservative 
methods  were  never  better  illustrated,  nor  was  the  punishment  ever 
more  prompt  and  severe  than  in  the  experience  of  the  bankers  in 
the  central  states  with  Gillette.  This  enterprising  financier  floated 
over  a  million  dollars  on  an  evanescent  band  of  cattle  and  absconded. 
leaving  a  score  or  more  of  banks  scattered  from  Chicago  to  Denver 
to  mourn  his  departure  and  their  loss.  Such  instances  as  this. 
which  may  be  found  of  frequent  occurrence,  should  put  the  banker 
on  his  guard  in  buying  paper  of  even  a  well-rated  individual  or 
corporation,  for  there  can  be  no  absolute  assurance  that  such  may 
not  be  up  to  the  limit  with  several  institutions.  Tt  would  be  well  if 
some  scheme  of  closer  co-operation  could  be  devised  that  would 
protect  the  interests  of  bankers  in  handling  commercial  paper  that 


68       PRACTICAL  PROBLEMS  IX  HANKING  AND  CURRENCY 

is  offered  Oil  the  open  market .  especially  as  of  late  there  has 
developed  such  an  extensive  business  in  this  line  of  investments. 
The  fact  that  responsible  firms,  engaged  in  legitimate  business, 
finance  in  part  their  enterprises  by  this  means  gives  commercial 
paper  its  standing  and  makes  it  an  attractive  field  for  dishonest  and 
irresponsible  concerns  to  float  loans  based  on  inflated  ami  fictitious 
assets.  The  only  protection  now  offered  to  the  country  banker  who 
seeks  an  outlet  for  his  surplus  funds  in  the  purchase  of  commercial 
paper,  is  the  advice  of  his  city  correspondent,  or  the  recommendation 
of  some  brother  banker  operating  in  the  place  from  which  the  paper 
emanates. 

Human  nature  is  much  the  same  the  world  over.  The  country 
banker  does  not  send  his  best  customer  paper  on  the  markets  of  the 
world  as  long  as  he  can  possibly  carry  him  from  his  own  resources. 
The  answers  given  to  inquiries  of  this  sort  are  seldom  satisfactory 
and  not  always  disinterested.  A  banker  is  not  often  free  to  disclose 
his  information.  He  should  be  the  recipient  of  the  entire  confidence 
of  his  customers,  and  he  would  be  recreant  to  his  trust  indeed  should 
he  ever  presume  to  reveal  any  of  such  secrets  unless  previously  fully 
authorized  so  to  do.  The  only  other  general  source  of  information 
that  exists,  aside  from  the  direct  representations  of  the  firms,  is  the 
reports  of  commercial  agencies.  There  should  be  a  more  intimate 
relation  than  exists  at  present  between  the  banking  fraternity,  who 
are  the  largest  dealers  in  commercial  credits,  and  the  commercial 
agencies,  whose  business  it  is  to  establish  correct  credit  ratings. 
Commercial  agencies  usually  depend  for  their  reports  on  their  attor- 
neys. Abraham  Lincoln  was  once  called  upon  to  give  a  report  on 
the  financial  standing  of  a  brother  attorney.  Lincoln  replied:  "I 
called  on  Jones  at  his  office  and  found  that  he  had  a  wife  and  baby, 
and  that  ought  to  be  worth  $50,000  to  any  man ;  he  possessed  half 
a  dozen  law  books,  two  wooden  chairs,  a  pine  table,  and  a  rat  hole 
that  is  certainly  well  worth  looking  into." 

Lincoln's  report  is  about  as  satisfactory  as  the  average  reply  one 
gets  from  a  letter  of  inquiry.  The  relations  of  the  banker  and  the 
commercial  agency  are  worthy  of  a  paper  devoted  entirely  to  their 
elucidation.  Suffice  it  to  say  there  are  grave  risks  involved  in 
purchasing  paper  from  brokers.  The  failure  of  the  National  Wheel 
Company   some  ten    years   ago   left    eighty-seven   banks    scattered 


GENERAL  BANKING  SECTION  69 

through  the  East  holding  such  quantities  of  its  bills  payable  that  they 
were  compelled  to  appoint  representatives  to  assist  in  the  reorganiza- 
tion of  the  concern  and  participate  in  its  management  for  several 
years  before  the  claims  were  finally  liquidated.  The  failure  of 
Porter  Brothers  and  the  subsequent  publication  of  their  condition 
revealed  the  fact  that  they  had  impartially  distributed  their  evidences 
of  indebtedness  so  that  some  even  found  lodgment  in  the  tills  of 
the  bankers  of  the  state  of  Washington.  Yet  such  seemed  the  best 
of  investments,  for  both  of  these  concerns,  cited  for  illustration, 
were  rated  with  ample  capital  and  high  credit. 

The  purchase  of  commercial  paper,  however,  represents  but  a 
temporary  investment  of  funds,  when  there  is  a  plethora.  A  bank 
is  not  fulfilling  its  full  duty  to  its  local  community  that  thus  uses  its 
funds  until  after  every  legitimate  local  demand  has  been  fully  pro- 
vided for.  An  authority  on  banking  has  asserted  that  a  bank  should 
have  20  per  cent,  of  its  investments  in  high  grade  bonds  and  secu- 
rities such  as  are  convertible  at  a  moment's  notice  as  may  be  required ; 
20  per  cent,  in  commercial  paper,  which  is  purchased  in  the  open 
market  and  which  involves  no  obligation  to  renew  at  maturity,  and 
•'  other  60  per  cent,  in  loans  to  his  customers  at  home  in  the  cur- 
rent business.  It  is  to  this  60  per  cent,  of  his  investments  that  I 
would  confine  myself  in  endeavoring  to  give  a  definition  of  a  good 
loan.  It  is  also  the  viewpoint  of  one  engaged  in  commercial  bank- 
ing, rather  than  that  of  the  savings  bank  or  trust  company.  The 
first  seeks  long  time  investments  bearing  low  rates  of  interest  with 
the  first  requisite,  absolute  security.  The  second,  if  we  may  judge 
from  the  records  of  some  of  the  more  recently  organized  trust 
companies  and  from  the  emphasis  laid  upon  the  interest  paying 
advantages  to  depositors,  seems  to  be  a  method  of  obtaining  large 

ns  from  the  general  public,  without  security,  for  the  purpose  of 
financing  the  undertakings  of  its  promoters. 

With  such   limitations  as  above  outlined  a  good  loan  may  be 

fined  as  "Such  an  advance  of  credit  as  is  a  reasonable  per  cent,  of 
the  market  value  of  commodities  in  the  process  of  conversion  into 
money."  Xo  definition  or  standard  can  be  so  precise  or  exact  as 
to  eliminate  the  necessity  of  the  exercise  of  judgment  in  its  applica- 

n.  and  in  no  field  of  endeavor  is  there  greater  need  for  such 
exercise  as  in  that  of  banking.     Such  a  definition  is  like  the  preach- 


;o 


PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 


er's  text,  but  a  basis  from  which  to  make  an  argument.  A  loan 
which  conforms  to  the  requirements  outlined  is  worthy  of  a  place  in 
the  most  exclusive  bill  pouch.  It  is  not  intended  to  exclude  that 
large  line  of  loans  based  on  undoubted  collateral,  but  is  intended  to 
refer  to  that  more  important  class  which  is  connected  with  pro- 
moting the  business  interest  of  the  community.  It  refers  to  the 
advances  to  the  cattleman  based  on  the  herd  which  he  expects  to 
convert  into  beef;  to  the  farmer,  who  desires  to  pay  his  current 
expenses  for  seeding  and  harvesting  to  be  repaid  with  the  marketing 
of  his  wheat,  his  cotton,  or  his  corn.  It  includes  loans  to  the  man- 
ufacturer, who  must  stock  up  with  raw  material  to  be  converted  into 
the  finished  product  in  the  regular  course  of  business.  It  includes 
loans  to  the  merchant,  who  has  a  stock  of  goods  purchased  in 
advance  of  his  needs,  and  who  prudently  discounts  his  bills  to  repay 
his  banker  from  current  sales.  It  applies  to  the  lumberman,  who 
desires  to  employ  temporarily  large  additions  to  his  capital,  to  pre- 
pare his  logs  in  the  winter  to  be  converted  into  lumber  during  the 
rest  of  the  year,  from  the  proceeds  of  which  he  will  retire  his  obli- 
gations. It  applies  to  the  miller,  who  must  fill  his  bins  and  ware- 
house when  wheat  is  offered,  to  be  converted  into  flour  from  day  to 
day.  It  applies  to  the  wheat  buyer,  who  is  on  a  large  scale  market- 
ing the  products  of  the  farmer  in  the  consuming  centers  of  the 
world.  In  fact,  it  applies  to  any  and  all  of  the  great  industries 
whereby  value  is  to  be  added  to  raw  material  by  the  application  of 
labor  to  change  its  form  or  its  situs. 

Whether  the  commodity  upon  which  the  loan  is  made  shall  be 
reduced  to  actual  or  constructive  possession  depends  on  a  number  of 
considerations,  the  most  important  of  which  are  the  personal  char- 
acter and  integrity  of  the  borrower  and  his  ability  to  handle  the  capi- 
tal entrusted,  temporarily,  to  his  care.  Doubts  should  be  resolved  in 
favor  of  the  security,  for  in  each  instance  it  is  the  money  of  others 
that  is  in  jeopardy,  if  danger  there  be.  Security  in  possession  is 
not  practicable  in  many  cases.  The  merchant  or  manufacturer  has 
his  capital  in  his  goods  and  materials,  which  are  not  available  for 
security  except  under  chattel  mortgage,  and  that  would  defeat  one 
of  the  main  objects  of  his  discounting  his  bills,  that  of  maintaining 
a  high  credit  rating.  If  the  borrower  is  possessed  of  integrity  and 
honor,  and  his  loan  conforms  to  the  definition,  he  will  hold  in  sacred 


GENERAL  BANKING  SECTION  71 

trust,  without  legal  formalities,  that  property  for  which  the  banker's 
money  has  been  borrowed  to  enhance  in  value  or  prepare  for  market. 
It  is  in  this  connection  that  the  banker  must  use  the  discriminating 
judgment  which  no  text-book  on  banking  can  supply,  and  which 
comes  from  familiarity  with  local  business  conditions  and  intimate 
acquaintance  with  the  personal  habits,  character,  and  ability  of  his 
customers.  The  application  of  this  rule  would  exclude  all  loans 
which  have  the  character  of  a  permanent  investment  in  the  business 
of  the  borrower.  Such  is  one  of  the  dangers  which  constantly  beset 
the  counting  house,  and  one  which  must  be  guarded  against  most 
vigilantly  by  the  banker  who  would  keep  his  assets  convertible  to 
meet  the  demands  that  may  be  made  upon  him.  The  time  of 
maturity  of  paper  may  not  be  specified  as  thirty,  sixty,  or  ninety 
days,  but  if  not  at  a  definite  time  it  should  mature  upon  the  definite 
happening  of  an  event  which  is  of  reasonable  certainty  of  occurrence. 
Such,  for  example,  is  the  maturity  of  a  crop,  the  completion  of  a 
contract,  the  marketable  condition  of  a  herd  of  cattle,  the  shearing 
of  a  flock  of  sheep,  the  conversion  into  lumber  of  a  drive  of  logs. 
It  is  these  indeterminate  loans  that  bring  disaster  to  more  banks 
than  any  other  one  cause  external  to  the  bank.  The  banker  who 
receives  money  from  his  depositors  repayable  on  demand  or  at  short 
notice  must  be  prepared  at  all  times  to  meet  a  reasonable  per  cent, 
of  his  obligations.  On  the  other  hand,  he  owes  a  duty  to  his  com- 
munity as  a  banker  to  provide  for  all  of  the  legitimate  commercial 
demands  for  accommodation.  To  meet  these  apparently  antag- 
onistic demands,  calls  forth  the  exercise  of  that  judgment  which  is 
the  characteristic  of  the  successful  banker.  Some  bankers  operate 
on  the  theory  that  they  will  loan  to  the  extreme  limit  allowed  by  law, 
and  keep  their  bills  receivable  at  all  times  well  up  to  or  beyond  their 
deposits.  They  operate  on  the  theory  that  they  will  make  all  the 
profit  possible,  and  if  hard  times  come  they  will  rely  on  their  city 
correspondent  to  rediscount  their  paper  to  enable  them  to  meet  the 
demands  of  a  decreasing  deposit  account.  Ts  the  game  worth  the 
candle?  Ma)  nol  the  lot  of  such  a  banker  be  comparable  to  that  of 
the  foolish  virgins?  When  he  applies  to  his  reserve  agent  to  carry 
him  through  the  financial  storm  which  finds  him  unprepared,  the 
reply  will  be.  "I  know  you  not."  A  bank  so  conducted  is  taking 
too  great  a  risk  and  throwing  too  much  of  the  burden  on  a  brother 


-_>       PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

hank.  Each  should  be  a  support  to  the  financial  affairs  of  the 
country  rather  than  a  drag  that  must  be  provided  for  lest  its  fall 
endanger  the  whole  financial  fabric.  The  first  resource  of  a  banker 
when  his  cash  reserves  begin  to  run  low  should  be  his  bonds  and 
other  securities,  while  his  customers  should  be  disturbed  as  little  as 
possible  in  their  legitimate  undertakings ;  yet  the  bill  pouch  should 
be  the  banker's  mainstay  in  meeting  his  obligations  rather  than  that 
he  be  put  in  the  humiliating  position  of  relying  on  another  banker 
more  prudent  than  himself.  Some  bankers  argue,  with  a  semblance 
of  logic,  that  it  is  better  to  earn  $50,000  profit  and  suffer  $10,000  loss 
each  year  than  to  earn  half  the  profit  and  suffer  no  loss.  Such  a  line 
of  argument  is  fallacious,  and  its  practice  is  suited  to  fair-weather 
banking  only.  When  the  stress  of  storm  comes  and  the  crash  of 
financial  houses  causes  him  to  examine  more  closely  his  resources, 
the  liberal  banker  will  be  apt  to  find  that  about  the  same  per  cent, 
of  his  paper  is  bad  as  is  represented  by  the  proportion  of  annual 
loss  to  profits.  In  such  a  bank  unsecured,  indefinite  overdrafts  will 
abound,  and  the  most  active  account  is  likely  to  be  the  overs  and 

shorts. 

The  requisite  of  a  good  loan  having  once  been  determined,  the 
next  question  is  to  whom  shall  these  loans  be  made?  Each  loan 
should  be  made  with  a  view  of  increasing  the  business  of  the  bank. 
The  loans  should  be  to  people  who  operate  in  the  community  in 
which  the  bank  is  doing  business.  In  that  way  a  large  per  cent,  of 
the  money  finds  its  way  back  into  the  tills  and  is  ready  to  do  service 
again,  while  loans  to  persons  operating  at  points  remote  from  the 
location  of  the  bank  withdraw  the  funds  from  local  circulation  and 
they  can  perform  their  duty  but  once.  Political,  religious,  social, 
and  fraternal  associations  should  have  no  weight  whatever  in  deter- 
mining the  advisability  of  making  a  loan.  Fortunate,  indeed,  is  that 
banker  who  by  genial  disposition  can  attach  many  friends  to  him- 
self and  his  institution,  but  it  is  unfortunate  if  such  desirable  traits 
of  character  render  him  amenable  to  the  influence  of  the  solicitation 
of  friends,  to  the  dethronement  of  cold,  critical  business  judgment 
in  passing  upon  all  matters  submitted  to  consideration  in  connection 
with  his  daily  transactions.  The  banker  is  to  the  highest  degree  a 
trustee — a  trustee,  first,  for  his  depositors,  who  expect  from  him  that 
inflexible  and  undeviating  integrity  which  can  always  be  relied  upon 


GENERAL  BANKING  SECTION  73 

under  any  and  all  circumstances ;  a  trustee  for  his  stockholders,  who 
have  entrusted  him  with  the  management  of  the  enterprise  they  have 
launched  with  such  hope  of  success  and  profit.  In  all  of  his  dealings 
with  the  public  this  sense  of  trusteeship  should  be  borne  in  mind, 
and  the  knowledge  that  in  the  execution  of  his  sacred  trust  he  should 
be  held  with  even  more  strictness  in  his  conscience  and  honor  than 
ever  the  court  of  equity  would  exact  in  holding  him  to  accountability 
for  his  actions. 

While  those  to  whom  loans  should  be  made  might  include  all  who 
are  engaged  in  legitimate  enterprises  in  the  community  or  who  have 
undoubted  security  to  offer ;  yet  there  are  those  to  whom  loans  should 
not  be  made,  and  chief  among  these  is  the  banker  himself.  The 
strenuous  business  life  of  to-day  demands  of  each  individual  who 
would  win  success  the  application  of  all  his  faculties  and  all  his 
energies  to  the  fullest  extent.  The  banker  is  usually  a  well-paid 
employee,  and  in  return  for  his  liberal  compensation  he  should 
render  to  his  institution  the  best  there  is  in  him.  If  interested  in 
various  speculations,  in  the  promotion  of  enterprises  requiring  finan- 
cial assistance,  he  is  not  in  the  position  of  one  who  can  exercise  that 
impartial  decision  so  essential  to  the  best  result  in  credit  rating.  No 
man  can  judge  himself  justly.  If  the  private  enterprises  of  the 
banker  require  assistance,  it  would  be  far  better  that  he  apply  to  the 
counter  of  some  other  banker,  who  can  refuse  to  extend  credit  based 
solely  on  the  merit  of  the  application.  It  would  be  better  still  if  the 
banker  would  confine  his  investments  to  lands,  bonds,  or  mortgages, 
which  can  be  looked  after  with  but  little  distraction  from  the  business 
of  the  bank. 

There  is  no  more  honorable  career  than  that  of  a  banker  who 
worthily  fulfills  his  duties.  He  stands  high  in  his  community,  is 
respected  for  his  integrity,  and  is  trusted  and  esteemed  by  his  fellow- 
man.  Not  even  the  cloth  holds  a  higher  place.  While  there  may 
be  some  persons  who  doubt  the  promise  given  to  those  who  will  "lay 
up  their  treasures  where  the  moth  doth  not  corrupt  rind  where  thieves 

nol  break  through  and  steal,"  yet  few  there  be  who  deny  the 
desirability  of  a  good  hank  balance,  even  though  they  may  not  have 
the  ability  or  faculty  of  acquiring  one.  Such  being  the  high  position 
of  the  banker,  lie  should  not  jeopardize  it  by  the  misuse  of  his  posi- 
tion to  his  own  personal  advantage.     Comptrollers  of  the  currency 


74 


PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 


in  their  various  reports  to  Congress  have  recommended  legislation 
tending  to  prevent  or  restrict  officers  and  directors  of  national  banks 
from  borrowing  from  the  institutions  under  their  charge.  In  the 
LVIth  Congress  Representative  Brosius  introduced  a  bill  to  correct 
this  abuse,  but  it  failed  of  passage.  The  necessity  for  some  stringent 
legislation  on  this  point  is  fully  demonstrated  by  Comptroller 
Ridgely's  last  report.  In  this  report  are  listed  the  records  of  418 
national  banks  which  have  failed  since  the  inauguration  of  the 
system.  The  causes  of  failure,  the  amounts  involved  and  the  pei 
cent,  of  loss,  if  any,  are  fully  set  forth  in  a  series  of  valuable  and 
instructive  tables.  The  causes  of  failure  are  divided  into  twenty- 
six  classes  from  A  to  Z,  and  from  the  great  similarity  between  some 
of  the  classes,  we  may  reduce  the  groups  to  eight,  as  follows: 

F.     Excessive  loans  to  others,  injudicious  banking,  and  de- 
preciation   of    securities 26 

J.     Excessive  loans  to  others,  and  investments  in  real  estate 

mortgages     6 

K.     Excessive  loans  and  failures  of  large  debtors 25 

U.     Injudicious    banking 21 

V.     Injudicious  banking  and  depreciation  of  securities 63 

X.     Investments  in  real  estate  and  mortgages  and  depreciation 

of    securities 14 

Y.     General    stringency    in    money    markets,    shrinkage    in 

values,  and  imprudent  methods  of  banking 49 

Total    204 

The  cause  of  failure  of  the  remaining  214  banks  covered  by  this 
report  involves  the  management  of  the  banks  by  reason  of  excessive 
loans  to  officers  and  directors,  fraudulent  management,  and,  in  some 
cases,  actual  embezzlement.  This  is  such  a  serious  state  of  affairs 
that  it  justifies  the  comptroller  in  his  repeated  warnings  to  Congress 
and  in  his  urging  for  remedial  legislation.  His  efforts  should  be 
seconded  by  the  bankers  themselves,  acting  through  their  national 
and  state  associations.  There  is,  however,  a  distinction  to  be  made 
between  loans  to  a  cashier  or  other  executive  officer  of  a  bank,  and 
loans  to  a  director.  The  former  should  be  absolutely  prohibited, 
while  the  evil  that  has  ensued  from  excessive  loans  to  directors  may 
be  easily  corrected  by  surrounding  them  with  sufficient  safeguards. 
To  deprive  directors  of  loans  would  work  to  the  injury  of  the  banks, 
because  every  bank  seeks  to  get  upon  its  board  of  directors  the 


GENERAL  BANKING  SECTION 


75 


responsible,  substantial  business  men  of  its  community.  It  is  a 
decided  advantage  to  have  men  as  directors  who  are  engaged  in 
active  business,  as  they  are  more  familiar  with  commercial  condi- 
tions and  needs.  They  are  in  position  where  their  knowledge  comes 
first  hand,  their  judgment  is  based  on  their  own  information,  and 
their  advice  is  most  valuable. 

Loans  to  subordinates  in  a  bank  are  undesirable.  It  is  far  better 
to  have  an  inflexible  rule  which  can  be  invoked  to  check  such  a 
request  at  the  outset,  than  to  have  a  refusal  cause  a  diminution  of 
that  enthusiasm  which  characterizes  the  average  bank  employee 
toward  his  institution.  Among  no  class  of  men  is  there  such  an 
admirable  esprit  dc  corps  as  among  bank  clerks.  In  no  other  class 
do  you  find  organization  the  prime  object  of  which  is  to  make  its 
members  more  efficient  and  more  valuable  to  their  employers. 

The  financial  troubles  that  beset  our  country  with  each  recurring 
season  are  not  due  to  too  little  currency,  but  to  the  injudicious  use 
of  that  we  have.  The  per  capita  circulation  of  the  United  States  is 
greater  than  that  of  any  of  the  great  commercial  nations  save 
France.  The  circulation  increased  from  $2,260,000,000,  or  $28.66 
per  capita  in  1902,  to  $2,532,000,000,  or  $31.02  per  capita,  in  1904. 
The  commercial  reports,  the  daily  press,  the  expressions  of  the 
leading  bankers  in  the  East  who  are  in  close  touch  with  conditions, 
assure  us  that  in  1902  we  passed  the  crest  of  prosperity.  While 
business  since  has  been  good  and  conditions  are  healthy,  yet  trade 
is  more  conservative  and  the  speculators  are  restricting  their  oper- 
ations. The  clearing  house  returns  confirm  the  statement  with  a 
shrinkage  of  $9,000,000  from  the  highest  point.  In  conformity 
with  these  conditions  we  would  naturally  expect  that  with  a  lessen- 
ing of  business  operations  there  would  be  a  decrease  in  the  loan 
account  of  our  banks,  but  in  this  the  statistics  do  not  bear  us  out. 
The  loans  and  discounts  of  the  national  banks  on — 

February  25,    1901,  were $2,982,489,300.89 

February  6.    [903 3, 1 59.534.591-89 

March  28,   1904 3.254.470,85874 

During  the  same  period  the  mints  of  the  country  have  been  pour- 
ing a  golden  stream  of  coinage  at  a  rate  heretofore  unprecedented 
in  tlii    or  any  other  country  for  a  similar  period. 

The  organization  of  new  national  banks  has  increased  the  bank 


;6   PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

note  circulation  $80,000,000.  With  diminishing  trade  activities  and 
increasing  currency  there  should  be  a  reduction  of  the  bills  receiv- 
able account  of  the  bank  to  correspond,  if  the  loans  of  the  banks 
were  of  that  liquid  character  that  is  deemed  requisite.  If  the  loans 
conformed  to  our  rule,  they  would  automatically  be  reduced  with 
lessened  trade  requirements.  That  the  loans  of  many  banks  do  not 
conform  to  this  rule  is  patent  to  any  one  who  will  examine  com- 
parative statements  and  find  a  bills  receivable  account  that  fluctuates 
in  the  upward  direction  only.  The  zeal  for  large  dividends  and  big 
business  spurs  the  banker  on  to  take  desperate  risks  and  to  tie  up 
his  funds  in  investments  that,  while  they  may  promise  profit,  are 
slow  to  realize  upon,  and  the  B-P  account  is  irreducible  to  conform 
to  business  conditions.  Liberal  dividends  are  desirable  and  much 
appreciated  by  stockholders,  but  the  smile  of  welcome  which  greeted 
the  receipt  of  the  liberal  dividend  check  will  have  passed  from 
memory  long  before  the  banker  recovers  from  the  frigid  stare 
which  greets  the  request  to  refund  some  of  these  profits  to  make 
good  losses  incurred  through  undue  risks. 

If  loans  were  made  which  depended  upon  the  sale  of  specific 
commodities  for  their  repayment,  the  time  of  settlement  would  not 
be  indefinitely  postponed  and  the  necessity  for  an  emergency  circu- 
lation would  not  press  so  earnestly  upon  us  with  each  recurring 
crop  season.  It  is  not  emergency  circulation  or  increased  circula- 
tion we  need  so  much  as  greater  flexibility  in  the  loan  account. 

Some  wag  said  of  the  original  greenbacks,  "They  were  like  the 
Hebrew  children,  they  were  the  issue  of  Abraham  and  knew  not 
their  redeemer."  Of  some  notes  it  may  be  said  they  at  least  know 
not  the  time  of  their  redemption.  Let  the  current  loans  be  made  to 
conform  to  legitimate  needs ;  exclude  the  right  of  a  banker  to 
manipulate  his  trust  funds  to  his  private  advantage,  and  the  chief 
cause  of  failure  will  have  been  remedied  and  banks  will  come  nearer 
fulfilling  all  of  the  demands  that  may  be  made  upon  them. 

"As  good  as  the  bank"  has  become  a  truism  and  a  standard  with 
which  to  measure  the  highest  responsibility  and  integrity.  It  should 
be  the  ambition  of  every  banker  that  this  should  not  be  a  meaningless 
phrase.  To  have  safely  and  honestly  conducted  the  affairs  of  a 
banking  institution,  to  have  worthily  received  the  trust  and  confidence 
of  one's  fellow-men,  is  to  have  achieved  success,  and  better  than 


GENERAL  BANKING  SECTION  yy 

much  gold  is  it  to  have  left  a  heritage  of  an  honored  name  and  a 
record  of  a  faithful  execution  of  the  highest  trust.  When  the  final 
summons  comes  to  the  good  banker,  he  can  wrap  the  drapery  of  his 
couch  about  him  and  lie  him  down  to  pleasant  dreams,  confident  of 
an  awakening  into  the  fulness  of  his  reward. 


PAYMENT  OF  INTEREST  BY  DISCOUNT  BANKS  UPON 
COMMERCIAL  DEPOSITS 

ADDRESS  DELIVERED  BY  FREDERICK  D.  KILBURN,  EX-SUPERINTENDENT  OF  THE  NEW 
YORK  STATE  BANKING  DEPARTMENT,  BEFORE  THE  STATE  BANK  SUPERVISORS' 
ASSOCIATION,    IOO5. 

It  has  been  suggested  that  I  speak  to  this  convention  upon  the 
subject  of  the  payment  of  interest  by  discount  banks  upon  com- 
mercial deposits.  I  wish  to  enlarge  my  subject  by  including  that 
of  the  policy  which  ought  to  be  pursued  with  reference  to  the  pay- 
ment of  dividends. 

It  is  obvious,  of  course,  to  every  experienced  banker  that  that 
policy  in  the  general  conduct  of  banking  business  is  imperative  which 
will  tend  to  conserve  the  interests  of  the  institution  as  a  corporation 
or  entity  by  itself,  and  which  will  above  all  other  things  insure  the 
safety  of  depositors.  Whatever  tends  to  defeat  this  general  result 
is  contrary  to  sound  banking  principles,  and  will  sooner  or  later  lead 
to  trouble,  and  possibly  to  failure. 

It  will,  of  course,  be  admitted  that  one  who  subscribes  to  the 
stock  of  a  bank  does  so  for  the  purpose  of  making  money  upon  his 
investment.  This  object  will  be  defeated  if  the  policy  which  I  have 
suggested  is  even  partially  ignored.  The  success  of  a  bank  depends 
more  upon  intelligent  public  confidence  than  upon  anything  else,  for 
without  this,  deposits  cannot  be  obtained,  and  without  deposits,  money 
cannot  be  made.  Tin's  confidence  among  intelligent  people  will  be 
based  upon  the  character  and  probity  of  the  directors  and  their 
management  of  th(  tution.     If  either  of  -'    e  elements  is  such 

as  to  repel  public  confidence,  the  institution  is  doomed  sooner  or  later 
to  failure.     This  confidence  can  be  inspired  only  by  men  of  char- 


PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

actor,  and  by  good,  safe,  and  conservative  management.  If  con- 
servatism is  sacrificed  to  an  undue  anxiety  for  larger  profits,  disaster 
cannot  be  far  distant. 

I  bave  spoken  of  and  written  upon  the  subjects  of  interest  and 
dividends  so  frequently  that  it  will  be  hard  for  me  to  do  more  than 
substantially  repeat  the  arguments  which  I  have  advanced  during 
the  last  nine  years,  the  time  I  have  been  superintendent  of  banks. 

I  regard  the  payment  of  interest  on  commercial  deposits  by  dis- 
count banks  as  the  greatest  menace  in  banking  to-day.  This  custom 
has  become  so  general,  and  the  rate  paid  is  on  the  average  so  great, 
that  it  constitutes  the  largest  item  of  expense  with  which  a  bank  has 
to  deal.  I  do  not  believe  that  there  is  a  conservative  banker  in  the 
country  to-day  who  does  not  down  in  his  heart  deprecate  the  practice 
of  paying  interest  on  these  deposits,  and  who  would  not  do  away 
with  it  if  he  could  see  his  way  clear  to  do  so  without  largely  reducing 
the  volume  of  his  business.  It  is  contrary  to  sound  principles  of 
banking,  and,  while  it  may  in  some  localities,  under  peculiar  local 
conditions,  not  be  of  that  serious  character  which  makes  it  very 
objectionable,  the  influence  and  example  are  bad,  and  unless  carefully 
watched,  will  grow  into  proportions  which  will  eventually  make  it 
an  unsafe  practice  even  in  places  where  to-day  it  seems  to  work 
advantageously. 

It  is  too  often  the  fact  that  there  are  men  in  the  banking  busi- 
ness whose  vision  is  so  contracted  as  not  to  extend  beyond  the  narrow 
limits  of  their  own  institutions,  and  who  do  not  take  into  considera- 
tion anything  but  the  immediate  influence  or  effect  which  this  policy 
may  have  upon  the  institutions  with  which  they  are  directly  con- 
nected. There  are  too  many  who  think  that  the  securing  of  an 
extra  few  thousand  dollars  on  deposit  is  the  one  thing  to  be  accom- 
plished. They  regard  the  swelling  of  deposits,  by  whatever  means, 
as  the  one  evidence  of  success  which  will  attract  the  public.  The 
fact  that  a  course  of  this  kind,  if  persisted  in,  may  in  the  long  run 
have  a  blighting  effect  upon  the  banking  interests  of  the  state  gen- 
erally seems  entirely  to  escape  their  notice  or  consideration.  They 
lose  sight  of  the  broad  question  and  its  effect  outside  of  their  im- 
mediate locality,  and  do  not  seem  to  realize  that  a  substantial  aboli- 
tion of  the  practice  throughout  the  state  would  make  conditions  so 
much  better,  and  banks  so  much  stronger,  that  their  own  institutions 


GENERAL  BANKING  SECTION 


79 


would  not  only  be  benefited  as  a  part  of  the  general  result,  but  that 
each  bank  would  experience  an  immediate  and  direct  benefit  through 
its  individual  action  in  doing  away  with  the  practice. 

This  practice  of  paying  interest  on  commercial  deposits  has  in  the 
last  few  years  grown  to  such  proportions  that  in  many  sections  of 
every  state  it  is  relied  upon  as  the  chief  means  of  attracting  deposits. 
This  competition  has  in  many  instances,  and  in  many  localities, 
developed  into  an  unseemly  scramble,  and  is  often  accompanied  by 
undignified,  misleading,  and  in  some  cases  absolutely  false  advertis- 
ing. I  have  many  times  remarked  that  the  province  of  a  bank,  and 
the  underlying  idea  and  intention  of  its  organization,  is  not  to  pay 
interest,  but  to  get  interest,  to  serve  the  public  conservatively,  and 
safely  invest  the  funds  committed  to  its  care.  Any  bank  that 
departs  form  this  general  policy  enters  the  field  of  unsafe  practices 
and  speculative  adventure. 

I  would  not  entirely  condemn  the  payment  of  interest  by  banks. 
My  contention  is  against  the  payment  of  interest  on  commercial 
deposits — the  money  used  by  merchants,  tradesmen,  and  manufac- 
turers in  the  daily  transaction  of  business.  To  advocate  anything 
more  than  this  not  only  would  make  the  task  of  any  supervising 
officer  in  accomplishing  any  reform  impossible,  but  would  trans- 
form the  faint  hope  of  success  which  may  be  entertained  by  the 
advocacy  of  the  abolition  of  the  payment  of  interest  upon  the  kind 
of  deposits  to  which  I  refer  into  the  certainty  of  absolute  failure. 

There  are  in  most  states,  and  especially  in  the  great  commercial 
states  of  the  Union,  other  institutions  organized  for  the  express 
purpose  of  gathering  and  investing  the  money  upon  which  interest 
should  be  paid.  In  my  own  state,  as  in  many  others,  we  have  sav- 
ings banks,  which  are  the  particular  custodians  of  the  money  of 
those  whom  I  have  frequently  termed  the  "provident  poor."  We 
also  have  trust  companies,  with  which  trust  funds  and  other  moneys 
not  used  in  the  daily  transactions  of  commerce  may  be  deposited 
upon  interest.  Savings  banks  are  of  an  eleemosynary  character, 
and  best  fitted  for  the  care  of  the  moneys  which  may  be  properly 
termed  "savings."  A  bank  of  discount  should  not  take  this  kind 
of  money,  but  leave  it  to  the  care  and  custody  of  institutions  organ- 
ized for  that  purpose. 

It  is  entirely  proper  that  trust  funds  should  be  deposited  in  trust 


80   PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

companies,  and  that  a  rate  of  interest  based  upon  existing  conditions 
should  be  paid  upon  these  deposits.  These  are  not  the  kind  of 
deposits  of  which  I  am  speaking-.  What  I  decry,  and  the  practice 
which  I  condemn,  is  the  payment  of  interest  upon  money  which  is 
daily  employed  in  the  business  of  the  country,  and  which  is  there- 
fore necessarily  subject  to  immediate  call  and  frequent  and  violent 
fluctuations. 

The  task  of  accomplishing  any  reform  in  the  direction  I  suggest, 
as  I  have  already  remarked,  is  a  difficult  one,  and  I  am  fully  cogni- 
zant of  the  fact  that  individual  effort  will  probably  result  in  little  or 
no  good.  It  can  be  done  only  through  impressing  the  bankers  of 
the  country  with  the  seriousness  of  the  practice,  and  the  advisability 
of  its  abolition,  or  at  least  its  material  modification,  and  with  the 
benefits  which  would  surely  follow  if  this  course  were  taken. 

Interest  is  a  continuing  and  constant  charge.  It  works  day  and 
night.  It  constantly  adds  to  the  obligations  of  a  bank,  and  all 
banks  which  to  any  appreciable  extent  indulge  in  its  payment  must 
necessarily  make  corresponding  gains  and  profits  in  order  to  meet 
this  everlasting  charge.  This  undermines  conservatism.  It  leads 
officers  and  directors  into  investments  which,  were  it  not  necessary 
to  meet  the  interest  charge,  would  not  be  made.  In  order  to  meet 
this  charge  there  is  a  great  anxiety  to  loan,  and  not  only  this,  but  to 
loan  at  the  highest  rates  obtainable.  It  is  a  universal  principle  in 
banking  that  the  loans  which  draw  the  highest  rate  of  interest  are 
as  a  rule  the  least  desirable  and  the  least  safe.  But  the  loans  must 
be  obtained.  Good,  conservative,  gilt-edged  loans  will  not  answer 
the  purpose ;  they  will  not  yield  revenue  sufficient  to  meet  the 
exorbitant  interest  rates  paid  by  the  bank  upon  deposits  in  addition 
to  the  legitimate  expenses  of  the  institution.  Risks  are  taken  which 
would  not  otherwise  be  done,  and  the  whole  conservative,  sound, 
and  safe  administration  of  the  affairs  of  a  bank  is  gradually  under- 
mined, and,  before  the  officers  and  directors  are  aware  of  the  fact, 
the  condition  of  the  bank  has  perhaps  become  precarious — and  all 
on  account  of  this  unwise  practice  of  paying  interest  upon  daily 
balances,  or  upon  deposits  of  the  character  to  which  I  have  referred. 
The  depositor  himself  loses  sight  of  his  own  interest  when  he  insists 
upon  receiving  interest  upon  the  money  which  he  is  daily  using  in 
the  transaction  of  his  business.     He  loses  sight  of  the  fact  that,  if 


GENERAL  BANKING  SECTION  8l 

the  bank  indulges  generally  in  this  practice,  it  is  more  than  apt 
eventually  to  become  unsafe,  and  to  result  in  loss  to  himself  and  his 
fellow-depositors. 

A  bank  which  does  not  pay  interest  upon  such  deposits  may  loan 
money  at  a  cheaper  rate,  the  business  of  the  bank  will  be  more  con- 
servatively conducted,  deposits  will  be  safe,  and  business  and  bor- 
rowers will  be  benefited,  and  the  bank  in  the  long  run  will  be  ahead. 
The  interests  of  both  stockholders  and  depositors  therefore  demand, 
if  not  the  entire  abolition  of  interest  upon  commercial  deposits,  at 
least  a  very  material  reduction  in  its  rate. 

The  public  is  most  vitally  interested  in  this  question,  and  in  the 
absolute  soundness  of  the  institutions  with  which  it  does  business ; 
for  the  effect  of  a  bank  failure  is  not  confined  to  the  immediate  stock- 
holder or  depositor,  but  is  reflected  upon  the  entire  community  in 
which  the  bank  is  located.  My  observation  leads  me  to  believe  that 
there  are  more  banking  failures  directly  traceable  to  exorbitant  rates 
of  interest  paid  upon  deposits  than  to  any  other  one  cause. 

In  my  own  state  we  have  communities  where  the  banks  pay  as 
high  as  4  per  cent,  upon  a  large  proportion  of  their  deposits.  I 
have  again  and  again  called  the  attention  of  the  bankers  of  my  state 
to  this  practice,  and  have  again  and  again  warned  them  against  its 
continuance.  There  is  no  law  preventing  it,  and  perhaps  no  law  can 
be  enacted  which  will  prevent  it,  and  a  supervising  officer  can  act 
only  when  he  can  demonstrate  that  the  practice  has  grown  to  such 
an  extent  that  it  is  unsafe  and  inexpedient  for  the  institution  to 
continue  longer  in  business ;  and  this  simply  means  that  it  has  been 
carried  to  such  an  extent  that  it  has  substantially  ruined  the  insti- 
tution. 

I  have  succeeded  in  accomplishing  some  little  reform  in  some 
places.  In  the  city  of  Albany,  for  instance,  not  long  since  the 
bankers  came  to  an  agreement  that  they  would  not  pay  interest  upon 
sums  less  than  $10,000,  payable  on  demand.  Everybody  in  the  city 
is  satisfied.  The  bankers  themselves  are  more  than  pleased  with  the 
result  which  has  thus  far  obtained.  I  have  succeeded  hi  other  places 
in  having  the  rate  reduced;  but  until  the  hankers  themselves  realize 
the  unconservative  nature  of  the  practice,  and  the  danger  to  which 
it  will,  in  my  opinion,  ultimately  lead,  there  is  hut  little  hope  of  any 
general  reform.  My  efforts  in  this  direction  have  been  misinter- 
6 


82   PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

preted  by  some,  for  I  have  received  letters  from  depositors  charging 
me  with  effort,  and  conspiracy,  to  benefit  the  banks  at  the  expense 
of  the  depositors.  They  do  not  realize  that  this  is  a  question  which 
goes  directly  to  the  safety  and  stability  of  the  institution,  and  there- 
fore to  the  safety  of  their  deposits.  If  the  practice  were  universally 
abolished,  none  would  be  hurt,  and  many  would  be  saved,  for 
bidding  for  deposits  would  cease,  and  beneficial  results  would  be 
reflected  throughout  the  whole  state  and  country. 

Closely  allied  to  the  question  of  the  payment  of  interest  on  com- 
mercial deposits  is  the  policy  of  the  payment  of  dividends  to  stock- 
holders. What  is  the  proper  policy  to  pursue  in  this  direction? 
As  I  have  already  in  substance  stated,  the  stability  and  absolute 
soundness  of  a  bank  as  an  entity  are  to  be  considered  above  all  other 
questions.  The  mere  suggestion  that  a  solvent  bank  should  not  pay 
dividends  will  perhaps  strike  some  as  exceedingly  novel,  and  as 
being  tinctured  with  ultra-conservatism.  I  hope,  however,  if  you 
will  indulge  me,  to  convince  you — or,  if  not  convince,  to  give  you 
sufficient  reasons,  in  my  opinion,  why  you  should  be  convinced — 
that  a  solvent  bank  under  certain  conditions  may  not  wisely  divide 
its  earnings  among  its  stockholders. 

All  business,  aside  from  banking,  in  this  country,  where  substan- 
tially all  business  is  done  through  banks,  is  dependent  upon  the  con- 
servative care  and  correct  principles  with  which  the  banking  interests 
of  the  country  are  conducted.  There  is  less  room  in  banking  than 
in  any  other  business  for  experiment,  or  the  employment  of  that 
kind  of  genius  which  is  forever  seeking  new  methods  of  money-mak- 
ing, and  constantly  discovering  some  shorter  and  quicker  route  to 
wealth  than  may  be  found  in  the  old  and  sure  methods  which  always 
characterize  a  solid  and  successful  bank.  Conservatism  should  be 
the  great  underlying  principle  governing  banking  institutions.  This 
principle  may  not  properly  be  applied  to  all  things  in  life.  There 
should  be  no  conservatism  in  war,  nor  in  love  of  country.  A  man 
should  not  conservatively  love  his  wife  and  children,  nor  be  con- 
servatively unselfish.  But  in  banking  a  man  should  never  forget 
that  he  is  the  trusted  custodian  of  the  people's  money,  and  that  he 
has  no  more  right  to  speculate  or  experiment  with  it,  or  take  any 
unnecessary  risk  with  it,  however  small  that  risk  may  be,  than  he 
has  to  see  how  near  he  can  shoot  to  another  and  not  hit  him. 


GENERAL  BANKING  SECTION  83 

Occasionally  dishonesty  in  bankers  is  discovered.  This  is  an 
evil  of  banking  that  cannot  well  be  guarded  against,  and  which 
cannot  be  discovered  until  committed ;  but  the  bane  of  banking  is  not 
so  much  dishonesty  as  the  want  of  careful  management,  and  the 
observance  of  what  some  sneer  at  as  old-fashioned  ideas  and 
methods. 

There  are  two  important  purposes  which  the  true  banker  should 
ever  keep  in  mind:  first,  to  keep,  so  far  as  human  judgment  can 
suggest,  the  deposits  intrusted  to  his  care  absolutely  safe ;  and,  sec- 
ond, to  return  to  his  stockholders,  either  in  cash  or  in  appreciation 
of  the  value  of  their  stock,  a  fair  return  upon  their  investments. 
The  second  object  is  dependent  upon  the  accomplishment  of  the 
first.  In  fact,  each  is  dependent  upon  the  other.  They  go  hand  in 
hand,  and  if  the  first  is  observed,  the  second  will  necessarily  follow. 

Xo  supervision,  however  wise,  able,  and  close,  will  make  a  bank 
successful  or  safe  if  the  immediate  management  of  the  bank  is  either 
dishonest  or  careless ;  for,  while  a  supervising  officer  may  correct 
some  evil  practices,  and  may  under  the  law  allay  some  unsafe  methods 
for  a  time,  and  may  possibly  prevent  further  loss  by  closing  the 
institution,  he  cannot  do  much  if  the  management  is  not  safe,  or  if 
it  is  dishonest.  Examinations  cannot  be  made  every  day.  A  super- 
vising officer  cannot  know  from  day  to  day  the  ordinary  transactions 
of  the  bank,  and  much  can  be  done  by  a  careless  or  dishonest  manage- 
ment between  inspections  which  may  absolutely  ruin  the  institution. 
A  careless  management  may  do  many  things  which  will  hurt  an 
institution,  and  still  be  within  the  law.  It  therefore  goes  without 
saying,  that  if  a  bank's  management  is  either  dishonest  or  careless, 
or  its  policy  unconservative,  failure  is  almost  inevitable. 

A  bank  should  be  treated  as  an  entity.  The  varying  personal 
interests,  desires,  and  necessities  of  individual  stockholders  should 
not  be  considered  in  determining  the  proper  policy  for  a  bank  to 
pursue.  That  policy  must  be  pursued  which  will  work  for  the 
success  of  the  bank  as  an  institution,  as  a  corjx>ration,  as  an  entity 
by  itself,  always  keeping  in  mind,  not  so  much  the  individual  interests 
of  stockholders,  as  the  safety  of  depositors,  and  the  reasonable 
accommodation  of  customers.  And,  if  these  two  objects  are  con- 
stantly kept  in  mind,  the  best  interests  of  the  stockholders  will  as 
surely  follow  as  the  night  follows  the  day. 


84   PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

Any  individual  who  in  his  private  business  spends  all  that  he 
makes,  and  perhaps  more,  and  makes  no  provision  against  a  rainy 
day,  is  looked  upon  by  all  good  business  men  as  doomed  to  ultimate 
failure.  So  a  bank  that  spends  by  dividing  among  its  stockholders 
all,  or  nearly  all,  of  its  earnings,  is  sooner  or  later  bound  to  meet 
the  same  doom. 

Men  seldom,  if  ever,  favor  a  particular  bank  with  their  deposits 
unless  they  think  that  bank  is  sound  and  safe.  Personal  friendship 
in  matters  of  this  kind  counts  for  very  little,  unless  other  things  are 
substantially  equal.  Ninety-nine  out  of  every  hundred  depositors 
look  at  the  strength  of  the  institution  with  which  they  are  asked  to 
do  business  before  opening  their  accounts.  It  is  therefore  necessary, 
in  my  opinion,  as  a  fundamental  part  of  the  scheme  of  banking  to 
place  the  bank  upon  a  basis  which  will  inspire  the  confidence  of 
those  to  whom  you  appeal  for  business  and  patronage.  Your  capital 
may  be  large,  but  even  this,  if  it  becomes  evident  that  you  are  spend- 
ing all  of  your  earnings,  or  only  carrying  that  part  of  them  to  sur- 
plus which  the  law  compels  you  to  do,  will  not  inspire  the  confidence 
necessary  to  permanent  success.  You  must  convince  the  public  that 
you  hold  the  safety  of  depositors,  the  soundness  and  conservatism 
of  your  institution,  as  of  more  importance  than  the  payment  of 
dividends.  I  would  rather  have  a  large  surplus  as  an  attraction  to 
draw  business  than  the  most  persistent  personal  solicitation,  the 
payment  of  dividends,  or  even  the  payment  of  interest  on  deposits. 

A  bank  can  usually  make  more  money  with  money  than  an  indi- 
vidual, especially  if  the  institution  is  properly  and  conservatively 
conducted,  and  the  interests  of  the  stockholder  himself  demand  that 
a  comparatively  large  surplus  shall  be  first  accumulated  before  any 
considerable  amount,  or  perhaps  any  amount,  is  returned  in  divi- 
dends. This  policy  does  not  involve  a  loss  to  the  stockholder  of 
anything.  His  stock  is  worth  just  so  much  more.  The  earnings 
are  enhanced  in  proportion,  and  usually  the  selling  value  of  the  stock 
of  a  bank  which  has  an  earned  surplus  of  large  proportion  is  much 
greater  in  proportion  than  the  stock  of  a  bank  with  a  small  surplus, 
and  is  usually  much  more  than  the  book  value  of  the  stock.  The 
personal  needs  of  stockholders  furnish  no  good  excuse  or  reason 
for  the  declaration  of  dividends.  Any  stockholder  whose  personal 
needs  interfere  with  a  policy  which  is  best  for  the  bank  as  an  insti- 


GENERAL  BANKING  SECTION  85 

tution  has  become  a  hindrance,  instead  of  a  help,  and  should  sell 
his  stock  and  sever  his  connection  with  the  institution.  Any  bank 
which  has  followed  the  policy  of  dividing  all,  or  nearly  all,  of  its 
earnings,  except  that  which  the  law  compels  to  be  carried  to  surplus, 
is  not  only  intrinsically  weak,  but  lacks  the  confidence  of  the  com- 
munity in  which  it  is  located  to  a  greater  or  less  extent.  This  rule, 
I  believe,  may  be  applied  with  few  or  no  exceptions. 

A  bank  which  has  accumulated  a  goodly  surplus  may  begin  the 
policy  of  declaring  dividends,  and  perhaps  larger  dividends  than 
could  otherwise  be  made ;  and  this  without  impairing  the  standing 
or  solidity  of  a  bank.  Banking  in  this  respect  differs  from  the 
business  of  other  stock  corporations  simply  because  the  public  is 
interested  to  a  much  larger  degree  than  in  other  corporations,  and 
in  a  different  way.  Manufacturing  corporations  do  not  invite  the 
credit  of  the  public.  They  have  no  money  on  deposit  belonging  to 
the  public.  They  do  not  need  to  accumulate  a  surplus  beyond  their 
immediate  business  requirements.  They  are  dealing  with  their  own 
money ;  and  if  one  of  them  fails,  the  general  public  is  not  affected  in 
the  way  or  degree  it  is  in  the  case  of  a  failure  of  a  bank.  A  differ- 
ent policy,  therefore,  must  be  pursued  by  a  bank.  It  is  not  dealing 
in  the  main  with  its  own  money,  but  with  the  money  of  others ;  it 
is  the  trusted  custodian  of  other  people's  money.  It  is  therefore 
its  duty  morally,  and  in  every  other  way.  to  follow  that  policy  which 
lies  nearest  the  path  of  absolute  safety. 

My  views  upon  this  subject  may  seem  radical  to  some,  but  name 
a  bank  which  has  enjoyed  even  a  reasonable  amount  of  success,  and 
I  will  show  you  one  which  has  pursued  the  policy  which  I  have 
indicated,  and  which  I  advocate.  I  know  there  are  many  banks  in 
my  own  state  which  refrain  from  making  any  dividends  at  all  until 
their  surplus  is  large,  in  some  instances  equaling  their  capital.  The 
earning  power  of  a  bank  should  be  tested,  and  should  be  evidenced 
by  the  amount  of  its  undivided  earnings,  in  order  reasonably  to 
appeal  to  the  public  for  confidence  ;  and  when  this  has  been  done, 
and  when  ;i  surplus  of  sufficient  size  to  afford  an  adequate  safety 
fund  to  depositors  has  been  accumulated,  then  dividends  may 
properly  be  declared  and  paid. 

Some    stockhold  1  m    to    think    that,    unless    they    get    an 

immediate  return  upon  their  money,  their  investment  is  a  bad  one. 


86      PRACTICAL  TROBLEMS  IN  BANKING  AND  CURRENCY 

They  are  entirely  mistaken.  Let  me  illustrate:  A  bank  begins 
business  with  a  capital  of  one  million  dollars.  Beyond  the  very 
limited  amount  which  under  the  law  it  must  carry  to  surplus  it 
divides  its  earnings  among  the  stockholders.  It  may  be  that  the 
stockholders  will  average  a  dividend  of  6  per  cent.,  perhaps  10  per 
cent.,  upon  their  investment.  The  million  dollars'  capital  remains, 
and  the  surplus  of  two  hundred  thousand  dollars,  or  20  per  cent.,  has 
been  accumulated.  The  stock  of  the  bank  is  worth  "120,"  book 
value,  if  no  other  additions  to  surplus  are  made.  In  most  cases,  and 
especially  among  small  shareholders,  the  dividends  are  dissipated. 
They  are  too  small  in  amount  for  independent  investment.  The 
bank  becomes  no  stronger.  If  any  change  is  made,  it  is  toward 
weakness.  The  bank  is  not  a  growing  institution,  and  the  public 
knows  it.  On  the  other  hand,  if  this  bank  pursues  a  policy  of 
accumulating  a  large  surplus,  and  of  even  paying  no  dividends  until 
the  surplus  is  equal  to  the  capital,  the  stock  is  worth  "200."  Its 
business  increases.  It  has  attracted  favorable  public  attention  and 
consideration.  Its  earnings  become  much  greater.  It  keeps  adding 
to  its  surplus.  The  bank  stock  continues  to  advance  in  price  and 
value.  The  stockholder  has  something  to  show  for  his  investment, 
for,  while  he  paid  one  hundred  cents  on  the  dollar,  he  can  sell  his 
stock  for  two,  three,  four,  or  five  hundred.  The  stock  of  such  a 
bank  as  this  will  sell  for  much  more  than  its  book  value.  Take  the 
Chemical  National  Bank  of  New  York  City,  for  instance,  the  book 
value  of  its  stock  is  but  $2,450  per  share;  its  selling  price  is  above 
$4,000. 

I  wish  that  a  concerted  move  might  be  made  by  the  supervising 
state  officers  throughout  the  country,  and,  if  possible,  that  the  power- 
ful influence  of  the  Comptroller  of  the  Currency  be  enlisted,  for  the 
purpose  of  bringing  these  subjects  to  the  attention  of  bankers  gen- 
erally in  all  parts  of  the  republic.  The  task  of  accomplishing  much 
may  seem  impossible,  and  yet,  if  we  can  enlist  the  efforts  of  large 
conservative  banking  interests  in  this  direction,  I  believe  that  much 
can  be  done. 

I  do  not  wish  to  be  understood  as  taking  a  pessimistic  view  of 
banking  conditions.  On  the  contrary,  I  recognize  the  fact  that, 
in  spite  of  the  drawbacks  to  which  I  have  referred,  banks  are,  as  a 
general  thing,  solvent  beyond  question,  and  making  money.     What 


GENERAL  BANKING  SECTION  87 

I  desire  is  that  a  halt  be  called  before  the  practices  which  I  condemn, 
and  which  I  believe  ought  to  be  condemned,  are  carried  too  far. 

It  is  sufficient  if  interest  is  paid  upon  the  money  deposited  for 
investment  purposes ;  there  perhaps  is  no  reasonable  objection  to 
this.  But  commercial  deposits  should  neither  demand  interest  nor 
be  paid  it.  Dividends  should  wait  upon  the  accumulation  of 
respectable  surpluses.  In  short,  a  policy  of  conservatism  and  safety 
should  be  adopted,  and  all  unsafe  and  unwise  practices  be  abolished. 
This,  it  seems  to  me,  is  good  business  and  good  sense,  and  it  ought 
not  to  be  difficult  to  impress  the  banking  fraternity  of  the  country 
with  its  importance. 


BANK  DEFALCATIONS— THEIR  CAUSES  AND  CURES 

BY  EDWARD  PRESTON  MOXEY,  EXPERT  BANK  EXAMINER  FOR  THE  UNITED  STATES 
DEPARTMENT  OF  JUSTICE  AND  PRESIDENT  OF  THE  EDWARD  P.  MOXEY  AUDIT 
COMPANY,    PHILADELPHIA. 

The  banking  business  offers  greater  temptations  for  the  abstrac- 
tion and  wilful  misapplication  of  assets  than  any  other  calling.  This 
can  be  explained  by  the  fact  that  the  only  commodity  dealt  in  is 
money,  or  that  which  is  payable  in  money,  rather  than  commodities 
of  general  use,  which  to  be  of  any  value  to  the  person  acquiring 
them  must  be  converted  into  money.  This  conversion  is  always 
attended  with  some  difficulty  and  risk,  as  the  commodity  can  ordi- 
narily be  identified.  In  the  case  of  money,  however,  no  conversion 
is  necessary  and  this  element  of  risk  is  eliminated. 

Bank  defalcations  can  be  divided  into  two  classes :  those  for 
which  the  officers  of  the  institution  are  responsible,  and  those  made 
by  the  clerical  force.  The  defalcations  by  officers  can  be  traced  to 
a  variety  of  causes,  among  which  might  be  mentioned  the  following: 

1.  The  using  of  bank's  funds  to  promote  enterprises  in  which 
the  officers  of  the  bank  are  financially  interested. 

2.  The  using  of  bank's  funds  for  speculation  in  stocks,  grain, 
cotton,  etc. 

3.  The  using  of  bank's  funds  for  gambling  purposes,  for  betting 
at  the  race-track,  and  for  extravagant  living. 


88   PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

4.  The  advancement  of  the  political  ambitions  of  its  officers. 

5.  Negligence  of  directors  in  allowing  officers  to  use  the  funds, 
under  the  guise  of  loans,  to  a  criminal  extent. 

6.  Assistance  rendered  by  the  clerical  force  of  the  bank  through 
their  lack  of  observation  of  the  criminal  acts  of  the  officers  or  their 
criminal   silence. 

7.  The  want  of  a  rigid  enforcement  of  the  criminal  laws  by  the 
courts. 

In  a  recent  address  of  the  Comptroller  of  the  Currency,  Hon. 
William  Barret  Ridgely,  at  the  convention  of  the  Illinois  State  Bank- 
ers' Association,  among  other  forcible,  sound  doctrines  annunciated 
said : 

No  national  bank  whose  officers  strictly  obeyed  the  National  Bank  Act 
ever  failed — not  one.  It  may  almost  be  said  that  not  one  which  did  not  make 
loans  in  excess  of  the  10  per  cent,  limit  has  ever  failed.  The  practically  uni- 
versal rule  is  that  all  failures  are  due  to  excess  loans  to  one  interest  or 
group  of  interests,  generally  owned  or  controlled  by  the  officers  of  the  bank 
itself. 

In  the  Comptroller's  office,  when  any  question  is  raised  in  regard  to  a 
bank  and  the  examiner's  reports  are  sent  for,  the  first  thing  looked  at  is  loans 
to  officers  and  directors,  and  then  excess  loans.  If  the  officers  owe  the  bank 
little  or  nothing,  and  there  are  no  excess  loans,  it  is  seldom  necessary  to  look 
much  farther,  for  the  bank  is  almost  sure  to  be  found  in  good  condition. 
There  are  rare  cases  of  sudden  flight  of  bank  officers,  disclosing  unexpected 
forgeries,  defalcations,  or  thefts  of  money,  leaving  the  bank  a  wreck ;  but  these 
are  almost  invariably  the  last  of  a  chain  of  misdeeds  beginning  with  the 
loaning  of  undue  and  illegal  amounts  by  the  officers  to  themselves  or  concerns 
in  which  they  are  interested. 

No  one  familiar  with  the  subject  will  controvert  the  above 
statement.  The  examination  by  the  department  of  justice  of  our 
government,  made  by  its  expert  examiners,  of  the  books  of  failed 
national  banks,  confirms  the  above  statement,  and  in  addition  shows 
that,  without  a  single  exception,  had  there  been  an  expert  examina- 
tion made  of  the  books  of  the  bank,  the  shortage,  by  whatever  name 
it  is  designated,  would  have  been  discovered  long  before  it  grew  to 
anything  like  the  proportions  that  many  of  them  did  before  the 
bank  collapsed. 

Among  the  first  things  that  the  average  promoter  does  is  to 
interest  some  officer  of  the  leading  bank  in  the  locality  where  the 
business  is  to  be  located,  or  the  stock  or  bonds  of  the  corporation 
are  to  be  sold  to  the  public.     In  some  instances  the  officer  is  pre- 


GENERAL  BANKING  SECTION  89 

vailed  upon  to  invest  all  of  his  available  cash  in  the  enterprise,  which, 
in  many  cases,  is  a  comparatively  small  amount,  but  which  repre- 
sents many  years'  savings  from  a  small  salary ;  while  in  others  he  is 
made  a  present  of  a  certain  amount  of  the  stock  of  the  corporation, 
which,  he  is  assured  and  verily  believes,  will  be  the  beginning  of  his 
march  along  the  financial  road  which  will  shortly  land  him  at  the 
millionaire's  mile-post. 

In  many  cases  the  bank  officer  is  made  an  officer,  a  director,  or  a 
member  of  the  advisory  board  of  the  corporation,  which  fact  is 
heralded  to  the  world  with  all  the  advertising  skill  of  the  promoter, 
and  upon  the  reputation  of  his  good  name  many  are  induced  to 
become  stockholders.  This  is  more  strikingly  the  case  in  smaller 
cities  and  country  localities,  but  the  large  cities  are  not  free  from  it 
by  any  means. 

Many  a  defalcation  which  has  caused  the  bank's  failure  is  trace- 
able to  its  officer's  interest  in  some  outside  enterprise,  and  the 
beginning  of  his  downfall  dates  from  the  day  he  made  the  first 
investment.  One  of  the  main  reasons  which  animated  the  promoter 
of  the  enterprise  in  financially  interesting  the  banker  was  that,  if  at 
any  time  the  concern  required  financial  assistance,  which  is  invariably 
the  case,  it  could  readily  be  obtained  through  him  from  the  bank  of 
which  he  was  an  honored  and  trusted  officer.  Experience  shows 
that  what  was  at  first  a  small  financial  assistance  soon  increases  in 
amount,  until  the  point  is  reached  where  it  means  disaster  to  all 
parties  interested,  if  additional  aid  is  not  given.  Then  it  is  that  the 
demand  for  money  must  be  met  to  prevent  the  bankruptcy  of  the 
corporation,  which  means  not  only  the  loss  of  the  money  invested 
by  the  officer  and  his  many  friends,  but  also  the  loss  of  his  reputation 
as  a  financier  and  a  banker  of  integrity. 

It  often  happens  that,  instead  of  becoming  financially  interested 
in  new  projects  or  outside  business  enterprises,  the  bank  officer  suc- 
cumbs to  the  seductive  influences  of  speculation.  He  tries  his  hand 
in  the  stock,  grain,  or  cotton  market,  with  the  belief  that  in  this 
way  he  can  amass  a  fortune  in  a  short  time  and  without  effort. 

He  pursues  the  same  method  that  is  followed  by  those  who  buy 
or  sell  stocks,  grain,  or  cotton  on  a  margin.  His  whole  idea  is  to 
"get  rich  quick,"  and  in  order  to  accomplish  this  he  either  buys  or 
sells  the  largest  amount  possible  with  the  smallest  amount  that  his 


90       PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

broker  will  accept  as  margin.  A  slight  adverse  change  in  the 
market  price  of  the  commodity  or  security  in  which  he  is  speculating 
wipes  out  his  margin,  and  a  call  from  his  broker  for  additional 
margin  to  carry  the  transaction  must  be  met.  Having  exhausted 
his  own  money,  and  being  convinced  that  his  ideas  as  to  the  future 
course  of  the  market  are  correct,  he  makes  the  false  step  of  "bor- 
rowing" money  from  the  bank  and  using  it  as  margin  with  his 
broker. 

It  is  only  a  question  of  time,  varying  according  to  the  size  of 
his  operations  and  the  fluctuations  of  the  market,  before  he  is  hope- 
lessly involved  and  financially  unable  to  return  the  money  of  the 
bank  which  he  has  used.  He  now  speculates  more  wildly  than 
before,  and  upon  a  much  larger  scale,  with  the  hope  that  one  for- 
tunate turn  of  the  market  will  enable  him  to  make  enough  money 
to  square  himself  with  the  bank.  In  his  case  history  only  repeats 
itself.  He  went  into  the  market  as  a  lamb,  and  in  consequence  is 
thoroughly  fleeced. 

In  some  cases  the  gambling-house  presents  more  attraction  than 
the  stock,  grain,  or  cotton  market,  but  it  is  not  often  that  this  means 
of  acquiring  wealth  is  resorted  to  by  the  bank  official,  as  it  is  not 
considered  by  many  as  reputable  as  speculation. 

Closely  associated  with  the  gambling-house  is  the  race-track, 
which  to  some  has  a  fascination  that  is  almost  irresistible.  The 
number  of  persons  who  bet  upon  a  certain  horse  to  win,  upon  a 
"dead-sure  tip,"  can  be  counted  by  the  myriads.  This  method  of 
gambling  is  resorted  to  to  a  greater  extent  by  the  clerical  force  of 
the  bank  than  by  its  officers. 

A  large  bank  in  an  eastern  city  was  wrecked  through  the  spec- 
ulation of  its  president  in  stocks ;  another  one,  through  speculations 
of  its  cashier  in  the  same  market.  Some  years  ago  a  large  bank 
in  the  Middle  West  was  wrecked  by  its  vice-president  in  an  attempt 
to  corner  the  wheat  market ;  while  a  bank  in  a  southern  city  was 
wiped  out  of  existence  by  its  president's  and  cashier's  speculations 
in  the  cotton  market.  The  number  of  cases  that  could  be  cited  are 
innumerable,  and  there  is  not  a  section  of  the  country  that  has 
escaped.  The  number  of  bank  wrecks  piled  upon  the  financial  beach 
is  a  silent  monument  to  this  truth. 

Many  bank  officers  feel  that  they  must  maintain  a  certain  social 


GENERAL  BANKING  SECTION 


91 


position  in  the  community  in  which  they  live,  and  to  do  this  many 
live  beyond  their  income.  They  attempt  to  indulge  in  the  extrava- 
gances practiced  by  their  wealthier  business  associates,  with  the 
result  that  they  use  the  bank's  money  with  which  to  do  it.  The 
failure  of  a  certain  national  bank  revealed  the  fact  that  its  cashier 
was  indebted  to  it  in  a  sum  exceeding  one-half  of  its  capital,  and 
that  a  large  portion  of  the  money  obtained  by  him  from  the  bank 
was  used  in  extravagant  living.  He  maintained  a  palatial  home ; 
his  family  dressed  extravagantly ;  they  entertained  lavishly ;  he  kept 
many  fast  horses,  and  indulged  in  various  other  forms  of  expensive 
luxury.  All  of  this  was  ostensibly  done  on  the  moderate  salary  he 
received. 

Some  bank  officers  labor  under  the  delusion  that  to  be  a  factor 
in  the  community  in  which  they  live  they  must  enter  the  "political 
arena."  They  strive  for  a  high  political  office.  The  bank  officer 
soon  exhausts  all  of  his  own  money  in  his  campaign,  and  next  uses 
the  money  of  the  bank  which  stands  ready  at  hand.  The  desire  for 
political  preferment  has  turned  the  head  of  many  a  man,  and  bankers 
are  not  insensible  to  its  influence.  The  ambition  of  a  president  of  a 
certain  national  bank  to  be  the  political  leader  of  his  party  and  the 
mayor  of  the  city  in  which  he  lived  caused  him  to  use  the  bank's 
funds  to  further  that  end  to  such  an  extent  that  the  bank  was  forced 
to  suspend,  which  entailed  a  severe  loss  upon  its  depositors  and 
stockholders. 

Bank  officers  whose  directors  do  not  direct  are  very  often  tempted 
into  the  use  of  bank  funds  under  the  guise  of  loans.  In  all  proba- 
bility they  would  not  have  broken  the  law  if  the  persons  selected  by 
their  fellow-stockholders  to  hold  the  office  of  director  had  been 
directors  in  fact  and  not  in  name  only.  A  director  is  a  trustee,  and 
he  cannot  fulfil  the  trust  he  assumes  without  knowing  that  the  affairs 
of  the  bank  are  being  properly  administered.  How  can  he  do  this 
when  he  leaves  the  management  almost  exclusively  to  the  president 
or  cashier?  The  number  of  banks  wrecked  by  its  officers  because; 
of  directors  not  directing  is  exceedingly  large. 

No  president,  vice-president,  cashier,  or  assistant  cashier  of  a 
bank  can  use  the  funds  of  the  institution  for  his  own  use  without 
the  same  being  known  to  at  least  a  portion  of  the  clerks,  and  it  is 
cither  through  their  wilful  silmcc  or  through  their  non-observance 


C)J 


PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 


of  what  is  being  done  in  their  presence  that  bank  officers  are  enabled, 
and  in  many  cases  encouraged,  to  take  the  funds  of  the  bank.  If 
bank  clerks  would  do  their  full  duty,  there  would  be  fewer  cases  of 
defalcations  by  bank  officers  than  at  present. 

It  is  an  undeniable  fact  that  the  laxity  with  which  the  criminal 
laws  of  our  land  are  enforced  by  many  of  the  judges  of  our  courts 
has  much  to  do  with  encouraging  bank  officers  criminally  to  use 
bank  funds.  They  see  in  too  many  cases  how  difficult  it  is  to  convict 
a  bank  official  who  has  misappropriated  bank  funds  when  defended 
by  a  shrewd  criminal  lawyer,  and  they  are  therefore  willing  to  take 
the  chances  of  detection  and,  if  detected,  the  results  of  a  trial  before 
a  judge  whose  interpretation  of  the  law,  the  admissibility  of  evi- 
dence, and  the  charge  to  the  jury  are  all  in  favor  of  the  accused.  It 
is  only  the  fear  of  the  law  that  keeps  those  from  violating  it  who 
are  not  actuated  by  high  motives  of  right,  and  judges  should  be  loath 
to  have  the  charge  of  the  lax  enforcement  of  the  law  laid  at  their 
doors. 

While  the  bank  officer  is  surrounded  on  all  sides  by  temptation, 
and  some  criminally  use  the  bank's  funds,  one  must  not  for  a  moment 
think  that  they  are  the  only  ones  connected  with  the  institution  who 
are  subject  to  temptation  and  who,  far  too  often,  listen  to  the  voice 
of  the  tempter  and  become  defaulters.  Every  clerk  in  the  bank, 
whether  he  handles  a  dollar  of  the  bank's  money  or  not,  is  subject 
to  many,  if  not  all,  of  the  temptations  that  beset  his  superior  officer. 
The  defalcations  by  the  clerical  force  of  banks  can  be  traced  to  nearly 
all  the  causes  enumerated  as  being  the  cause  of  defalcations  by  offi- 
cers, and  also  to  a  variety  of  other  causes,  among  which  are  the  fol- 
lowing : 

i.  Temptations  offered  by  loose  methods  of  conducting  the 
business  of  the  bank  or  of  keeping  its  books  and  accounts. 

2.  The  lack  of  proper  supervision  by  officers  and  directors. 

3.  The  criminal  using  of  bank  funds  by  its  officers  without 
detection  and  punishment,  encouraging  clerks  to  do  likewise. 

Many  a  bc.ik  clerk  who  has  been  unfaithful  to  his  trust  and  has 
used  the  funds  of  the  institution  with  which  he  was  connected  for 
speculation  in  the  sto-ok,  grain,  or  cotton  market,  or  for  games  of 
chance  at  the  gambling-house,  or  for  betting  at  the  race-track,  or 
for  extravagant  living,  etc.,  has  b^en  encouraged  to  take  his  first 


GENERAL  BANKING  SECTION  93 

false  step  by  the  loose  manner  in  which  the  affairs  of  the  bank  were 
conducted  and  its  accounts  kept.  He  saw  the  slipshod  way  in  which 
things  were  done  by  everyone  connected  with  the  bank,  that  clerical 
errors  in  the  books  were  not  located  and  corrected,  and  that  general 
mismanagement  prevailed.  Is  it  any  wonder  that  he  used  the  funds 
of  the  bank  and  took  the  chances  of  detection  with  such  a  condition 
of  affairs  surrounding  him  ?  The  marvel  is  that,  under  such  condi- 
tions, more  do  not  succumb  to  temptation. 

Another  cause  of  defalcation  by  bank  clerks  can  be  ascribed  to 
the  lack  of  a  proper  supervision  of  their  work  by  the  officers  and 
directors  of  the  institution  with  which  they  are  connected.  The 
bank  may  be  well  managed  in  all  other  respects.  The  officers  and 
directors  may  loan  its  funds  judiciously  and  well,  be  very  attentive 
to  the  patrons  of  the  bank,  and  on  the  alert  to  add  to  its  already 
large  list  of  customers.  But  all  of  this  will  not  counterbalance  the 
evil  results  arising  from  the  lack  of  supervision.  The  number  of 
defalcations  traceable  to  this  cause  is  undoubtedly  large. 

In  detailing  some  of  the  causes  of  bank  defalcations  by  the 
clerical  force,  the  criminal  using  of  bank's  funds  by  officers  without 
detection  and  punishment  is  one  which  should  not  be  overlooked. 
Manv  a  bank  clerk  who  sees  the  president  or  cashier  of  the  bank 
with  which  he  is  connected  using  its  funds  in  speculation  or  business 
projects  to  a  criminal  extent,  and  doing  so  with  perfect  impunity, 
as  far  as  the  board  of  directors  is  concerned,  is  induced  to  do  the 
same  thing.  He  sees  how  easy  it  is  for  the  officer  to  get  the  money 
of  the  bank,  and  he  learns  the  methods  he  adopts  in  an  endeavor  to 
conceal  the  fact.  He  hears  of  the  enormous  profits  that  the  officer 
has  made  in  speculation  and  what  not.  He  knows  that  this  has 
been  going  on  sometimes  for  years  without  discovery.  He  there- 
fore concludes  that  what  the  officer  can  do  the  clerk  can  do  also. 
1  fe  takes  a  "flyer"  in  the  market  and  uses  the  funds  of  the  bank  to 
margin  the  transaction. 

The  bank  clerk  defaulter,  when  his  crime  is  discovered,  is  rcn- 

lly  brought  t<>  the  bar  of  justice  to  answer  for  his  misdeeds.  I  'r 
is  usually  convicted.  IN'  has  no  influential  associates  to  use  their 
power  to  shield  him.  He  has  no  money  or  wealthy  relations  or 
friends  who  are  willing  to  furnish  money  with  which  to  employ  able 
criminal   lawyers  to  defeat  the  ends  of  justice.     The  bank  officer, 


94      PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

having  what  the  bank  clerk  lacks,  often  escapes  the  just  punishment 
his  criminal  acts  demand. 

The  reader  must  bear  in  mind  that  there  are  no  cures  for  all 
kinds  of  defalcations,  but  they  may  be  reduced  to  a  minimum  if 
banks  are  properly  managed.  The  cures  that  are  suggested  for 
defalcations  arising  from  the  causes  discussed  are  as  follows: 

1.  Directors  directing,  being  more  than  figure-heads  in  the 
management  of  the  bank's  affairs. 

2.  The  employing  of  a  sufficient  clerical  force  properly  to  record 
the  daily  transactions  of  the  bank.  The  non-use  of  all  short-cut 
methods  of  accounting  which  are  at  the  expense  of  safety. 

3.  The  using  of  a  system  of  accounting  that  is  surrounded 
with  every  known  device  for  safety. 

4.  The  thorough  overhauling  of  the  books  of  every  department 
of  the  bank  by  expert  accountants  at  irregular  and  frequent  periods. 

5.  The  realization  by  directors  that  examinations  made  by  the 
official  examiner  afford  little  protection  against  dishonesty  of 
employees,  and  at  best  is  too  hurriedly  made  to  be  of  much  value. 

6.  Prohibiting  bank  officers  from  borrowing  money  from  the 
bank  with  which  they  are  connected,  except  upon  the  most  approved 
collateral,  and  the  approval  of  such  loans  by  the  board  of  directors 
by  a  formal  vote  at  a  meeting  of  the  board. 

The  number  of  directors  of  the  banks  in  the  United  States  who 
do  not  direct  is  much  larger  than  might  be  supposed,  and  usually 
it  is  the  bank  where  directors  are  impotent  that  is  looted  by  one  or 
more  of  its  officers  or  clerks.  Where  directors  direct,  defalcations 
are  almost  unknown. 

The  employing  of  a  sufficient  clerical  force  properly  to  record 
the  daily  transactions  of  the  bank  is  a  cure  for  defalcations  that 
must  not  be  ignored.  Too  many  officers  of  our  banking  institutions 
are  attempting  to  conduct  their  business  with  an  inadequate  clerical 
force  who,  to  keep  up  their  work,  resort  to  every  kind  of  hieroglyphic 
entry  that  their  fertile  brain  can  devise.  The  non-use  of  all  short- 
cut methods  of  accounting,  which  are  at  the  expense  of  safety  is  a 
cure  for  defalcations  that  can  be  prescribed  to  advantage.  A  large 
number  of  defaulters  resort  to  false  entries  upon  the  books  to  con- 
ceal their  shortage.  The  use  of  short-cut  methods  of  accounting 
makes  falsifications  easier  of  accomplishment  and  harder  of  detec- 


GENERAL  BANKING  SECTION 


95 


tion.  Short-cut  methods  are  the  bank  thief's  friend  and  are  wel- 
comed by  him.  Anyone  familiar  with  the  English  system  of  bank 
accounting  knows  that  such  methods  are  not  tolerated,  and  if  our 
banks,  instead  of  gradually  drifting  away  from  the  point  of  safety, 
would  adopt  the  English  methodical  methods  of  recording  trans- 
actions, they  would  be  better  off  in  the  long  run.  Defalcations  in 
English  banks  are  almost  unknown.  Does  anyone  for  an  instant 
suppose  that  the  English  bank  clerk  is  more  honest  than  his  Ameri- 
can cousin? 

The  using  of  a  good  system  of  accounting  is  undoubtedly  a 
cure  for  many  kinds  of  defalcations.  The  system  used  should  con- 
tain every  known  device  for  safety  that  the  ingenuity  of  the  expert 
accountant  can  devise.  It  should  fit  the  requirements  of  the  busi- 
ness. A  system  that  would  be  a  success  in  one  bank  would  be  a 
flat  failure  in  another,  and  vice  versa.  The  volume  of  the  business 
transacted,  the  method  of  conducting  it,  and  the  number  of  clerks 
employed  to  handle  it  are  all  factors  that  must  be  considered  in 
devising  a  system  of  accounts.  The  system  of  accounting  that  was 
used  forty  years  ago,  and  in  a  number  of  cases  used  to-day,  is  almost 
worse  than  useless.  It  lacks  the  safeguards  which  the  improved 
systems  of  to-day  provide. 

The  thorough  overhauling  of  the  books  of  every  department  of 
a  bank  by  expert  accountants  at  irregular  and  frequent  periods  is 
considered  by  those  who  have  made  a  study  of  the  subject  as  being 
one  of  the  best,  if  not  the  very  best,  cures  for  defalcation  that  can 
be  suggested.  Comptroller  Ridgely  in  commenting  upon  this  sub- 
ject, in  his  address  previously  referred  to  said : 

The  directors  should  have  frequent  thorough  examinations  made  by  com- 
mittees of  the  board  or  experts  employed  for  that  purpose.  These  should  be 
made  independently  of  the  active  officers  of  the  bank  and,  with  all  the 
incredulity  of  the  proverbial  Missourian,  everything  should  be  shown  and  no 
man's  word  taken  for  anything. 

Every  clerk  and  every  officer  of  the  bank  should  be  examined  and 
checked  up  as  thoroughly  as  possible,  and  required  to  show  the  examining 
committee  or  the  auditor  just  how  the  matters  in  his  charge  stand.  No  man 
who  is  in  a  position  of  trust  has  any  right  to  resent  such  an  examination, 
and  one  who  has  a  proper  appreciation  of  the  relation  he  bears  to  those 
who  have  reposed  trust  and  confidence  in  him  will  welcome  such  an  oppor- 
tunity to  show  that  he  has  been  faithful  and  efficient. 

If  all  boards  of  bank  directors  would  do  their  full  duty  in  the  way  here 
outlined,  bank  failures  would  almost  come  to  an  end.     Banks  would,  of  course, 


()()       PRACTICAL  PROBLEMS  IN  RANKING  AND  CURRENCY 

make  losses,  and  occasionally  one  might  fail,  but  it  would  be  rare,  and  the 
result  of  very  unusual  bad  judgment  and  incapable  management.  We  should 
very  seldom  have  such  sudden  and  sensational  failures  of  banks,  looted  from 
the  inside  by  nun  who  have  stood  high  in  their  communities,  and  even  thought 
to  be  models  of  honesty  and  trustworthiness. 

Hon.  James  H.  Eckels,  ex-Comptroller  of  the  Currency  and 
president  of  the  Commercial  National  Rank  of  Chicago,  in  speaking 
upon  this  suhject,  said: 

I  believe  that  a  bank  cannot  make  a  better  investment  than  to  have  an 
independent  audit  made  by  an  expert,  for  the  benefit  of  both  the  officers  and 
the  directors.  To  such  independent  audits  can  be  given  more  time  and  a 
ir.-ire  complete  analysis  of  the  condition  of  the  bank  being  examined  than 
under  the  ordinary  examination  made  by  the  directors  without  the  aid  of 
an  expert. 

Hon.  Charles  G.  Dawes,  ex-Comptroller  of  the  Currency  and 
president  of  the  Central  Trust  Company  of  Illinois,  of  Chicago, 
expresses  himself  upon  this  subject  as  follows: 

In  reference  to  the  advisability  of  a  periodical  examination  of  the  affairs 
of  banks  and  trust  companies,  made  by  experts,  for  the  benefit  of  the  officers 
and  directors  of  such  institutions,  I  will  state  that  I  deem  such  a  course  as 
most  advisable.  While  in  the  larger  cities  the  public  examiners  have,  as  a 
rule,  a  compensation  sufficient  to  enable  them  to  make  a  proper  examination, 
the  National  Banking  Act,  in  its  provision  for  compensation  of  examiners 
outside  of  the  central  reserve  cities,  in  effect  places  a  premium  upon  hasty  and 
incomplete  work.  This  defect  has  been  recognized  by  most  of  the  Comp- 
trollers of  the  Currency,  and  the  attention  of  Congress  invited  to  it.  How- 
ever, both  in  the  central  reserve  cities  and  elsewhere,  a  periodical  examina- 
tion by  experts  of  the  affairs  of  banking  institutions  I  deem  important. 

The  examination  by  the  expert  accountant  furnishes  an  addi- 
tional protection  to  the  banker  against  dishonesty ;  it  is  a  necessary 
supplement  to  the  work  of  the  official  examiner ;  it  improves  the  tone 
and  efficiency  of  the  working  force ;  it  improves  the  system  of  book- 
keeping; and  it  increases  the  confidence  of  the  depositors  and  stock- 
holders. 

Few  realize  in  how  many  ways  a  bank  may  be  defrauded  by  its 
officers  or  clerks.  A  large  volume  could  be  written  on  "how  to  rob 
a  bank"  without  exhausting  the  subject.  There  are  few  banks  in 
the  United  States  which  have  not  suffered  some  loss  from  the 
dishonesty  of  an  officer  or  clerk.  Why  will  banks  wait  until  they 
have  sustained  a  severe  loss  through  the  dishonesty  of  a  trusted 
employee  before  having  their  books  examined  by  an  expert  account- 


GENERAL  BANKING  SECTION  97 

ant?  To  the  prudent  business  man  the  question  is  unanswerable. 
There  is  no  bank  which  does  not  receive  full  value  in  the  security  of 
its  business  for  the  money  which  it  spends  on  an  audit  by  an  expert 
accountant. 

The  official  examinations  as  now  conducted  are  of  little  value 
against  the  dishonesty  of  employees.  They  are  not  thorough  enough 
and  are  too  hurriedly  made.  There  are  75  national  bank  examiners 
in  the  United  States  to  make  10,914  examinations  each  year,  or  an 
average  of  145  to  each  examiner.  Assuming  that  all  the  examin- 
ers are  steadily  employed  every  day  in  the  year,  excepting  Sundays 
and  legal  holidays,  when  the  banks  are  closed,  they  can  devote  on 
an  average  only  two  days  to  each  examination.  Even  the  largest 
banks,  with  hundreds  of  employees  and  thousands  of  accounts,  are 
examined  in  a  few  days. 

The  audit  of  bank  books  by  expert  accountants  is  a  comparatively 
recent  development,  but  it  is  rapidly  being  adopted  by  conservative 
bankers  everywhere.  It  furnishes  the  best  safeguard  against  dis- 
honesty, the  best  means  of  improving  the  administrative  service  of 
the  bank,  and  is  a  strong  bid  for  public  confidence  and  support. 
The  bank  that  surrounds  itself  with  every  safeguard  is  in  the  strong- 
est position  to  command  the  banking  business  of  the  community. 


NATIONAL  BANK  EXAMINATIONS 

ADDRESS  DELIVERED  BY  JOSEPH  CHAPMAN,  JR.,  CASHIER,  NORTHWESTERN  NATIONAL 
BANK  OF  MINNEAPOLIS,  BEFORE  THE  SOUTH  DAKOTA  BANKERS'  ASSOCIATION 
IN  JUNE,   1905. 

Thf.  subject  of  national  bank  examinations  has  received  quite  a 
little  attention  of  late  through  the  failure  of  some  institutions  where 
the  national  bank  examiner  has  been  held  by  the  public  generally  to 
have  been  at  fault.  The  time  has  come  when  the  bankers  of  the 
country  ought  to  look  the  question  of  examination  squarely  in  the 
face,  and  ascertain  whether  or  not  it  is  possible  for  the  department 
at  Washington  to  give  us  different  examinations  from  those  it  is 
now  giving.  Among  many  bankers  the  national  bank  examination 
7 


()S   PRACTICAL  PROBLEMS  IN  RANKING  AND  CURRENCY 

has  come  to  be  looked  upon  more  or  less  as  a  farce.  There  is  no 
question  but  that  the  directors  of  banks  feel  that  as  long  as  the 
national  bank  examiner  reports  that  the  bank  is  all  right  there  is  no 
cause  for  them  to  worry,  and  the  depositors  feel  likewise  that  their 
money  is  safe.  The  reason  that  both  the  directors  and  depositors 
feel  safe  is  probably  because  they  are  familiar  with  Section  5240  of 
the  Revised  Statutes  of  the  United  States,  which  states  that,  "The 
Comptroller  of  the  Currency,  with  the  approval  of  the  Secretary  of 
the  Treasury,  shall  as  often  as  shall  be  deemed  necessary  or  proper, 
appoint  a  suitable  person  or  persons  to  make  an  examination  of  the 
affairs  of  every  banking  association,  who  shall  have  power  to  make 
a  thorough  examination  into  all  the  affairs  of  the  association,  and  in 
doing  so  to  examine  any  of  the  officers  and  agents  thereof  on  oath, 
and  shall  make  a  full  and  detailed  report  of  the  condition  of!  the 
association  to  the  comptroller." 

The  office  of  the  Comptroller  of  the  Currency  is  a  political  office. 
The  selection  of  a  man  to  fill  this  place  is  left  to  the  President  of  the 
United  States,  and  he  may  or  may  not  be  a  man  who  is  fitted  by 
education,  training,  and  bent  for  that  most  important  position.  I 
do  not  think  that  the  importance  of  the  possibilities  of  this  office  are 
appreciated  by  the  bankers  and  by  the  public  generally.  It  is  a 
position  calling  for  the  highest  order  of  executive  ability,  discretion, 
tact,  and  backbone.  It  is  a  position  that  should  pay  a  salary  com- 
mensurate with  the  responsibility  of  the  office.  At  the  present  time 
this  is  not  the  case.  The  salary  is  small  and  the  man  filling  this 
position  is  very  apt  to  correspond  with  the  salary.  The  country  has 
been  most  fortunate  in  obtaining  men  of  high  character  who  have 
filled  this  post  with  great  honor  to  themselves  and  to  the  banking 
profession.  However,  as  long  as  the  office  is  a  political  one,  given 
as  a  reward  for  labors  performed,  there  is  danger  that  the  man  who 
holds  this  important  position  will  be  susceptible  to  influence. 

But  the  curse  of  politics  in  the  appointment  of  the  Comptroller 
of  the  Currency  is  secondary  to  the  far  more  important  matter  of 
the  appointment  of  the  national  bank  examiners  themselves.  No 
matter  how  good  a  man  may  be  in  the  office  of  comptroller,  he  is 
powerless  to  appoint  his  assistants.  These  men  are  nominated  or 
appointed  by  the  United  States  senators  from  the  different  states, 
and  the  only  qualification  that  appears  to  be  necessary  to  get  the 


GENERAL  BANKING  SECTION  99 

appointment  of  national  bank  examiner  is  that  the  person  applying 
should  have  a  political  pull  and  influence  with  the  senator.  The 
question  of  ability  and  fitness  is  lost  sight  of  in  the  eagerness  of  the 
senators  to  regard  their  friends  and  scatter  plums  to  the  faithful. 

To  a  convention  of  bankers  this  statement  is  no  news.  To  the 
public  generally  it  may  be.  In  anything  I  say  I  do  not  wish  to  be 
classed  as  sensational  or  revolutionary;  but  I  believe  it  is  time  that 
we  talk  these  matters  over  seriously,  in  order,  that  some  method 
may  be  devised  whereby  the  entire  machinery  of  the  control  and 
supervision  of  national  banks  of  this  country  may  be  removed  from 
politics,  so  that  we  can  get  men,  from  the  comptroller  down,  who 
shall  be  selected  simply  for  their  ability  and  fitness  to  perform  the 
work,  men  who  shall  be  kept  in  office  as  long  as  their  work  is  satis- 
factory, and  men  who  shall  be  paid  a  salary  commensurate  with  the 
responsibility  they  assume  and  the  labor  they  perform. 

It  is  to  the  credit  of  the  national  banking  system  that  it  has  forged 
to  the  front,  and  made  itself  a  power  in  this  land,  in  spite  of  the  loose 
methods  provided  by  the  government  for  its  supervision  and  its  con- 
trol. It  is  to  the  credit  of  the  officers  and  directors  of  national 
banks  that  their  institutions  are  in  such  excellent  shape,  regardless 
of  the  namby-pamby  national  bank  examination.  In  order  that  we 
may  understand  how  ridiculous  and  silly  the  performance  called  a 
national  bank  examination  really  is,  it  is  necessary  for  us  to  read  a 
few  figures. 

According  to  the  report  of  the  Comptroller  of  the  Currency,  dated 
March  14,  1905,  there  were  in  operation  in  the  United  States  5587 
national  banks.  Each  bank  is  required  to  be  examined  twice  a 
year,  which  makes  the  total  number  of  examinations  in  one  year, 
11,174.     The  totals  represented  by  these  5,587  banks  are  as  follows: 

RESOURCES 

Loans  and  discounts $3,888,233,694.79 

United  States  and  other  bonds 1,216,374,36574 

Banking  house  furniture  and  fixtures  and  other 

real    estate 148,663,931.83 

Cash  and  due  from  other  banks 2,054,855,693.80 

Total     $7,308,127,686.16 

LIABILITIES 

Capital    $782,487,884.67 

Surplus   and    profits 603,555,715.08 


IOO  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

Circulation     430,995,523-00 

Bonds    borrowed 34,810,906.69 

Deposits     5,427,239,316.68 

Other    liabilities 29,029,340.04 


Total     $7,308,127,686.16 

To  examine  and  audit  and  report  to  the  boards  of  directors  and 
to  the  depositors  in  these  5587  banks,  there  are  employed  seventy- 
five  men  on  a  commission  basis.  In  other  words,  the  examiner  gets 
a  certain  amount  of  money  for  the  capital  and  total  footings  of  any 
bank.  If  he  can  examine  a  bank  with  two  million  dollars'  worth 
of  assets  in  one  day,  it  is  to  his  interest  to  do  so,  for  he  gets  no  more 
money  if  he  takes  a  week,  two  weeks,  or  three  weeks  to  do  this 
work.  To  any  thinking  man  the  idea  of  seventy-five  men  making 
11,174  examinations  of  banks,  whose  total  deposits  amount  to 
$5,427,239,316.68,  would  be  ridiculous  were  it  not  that  it  is  not  even 
necessary  that  these  seventy-five  men  have  any  knowledge  or  expe- 
rience in  auditing ;  they  simply  have  to  have  a  political  pull.  This  is 
probably  one  answer  to  the  question  which  is  heard  so  many  times, 
when  anything  goes  wrong  in  a  national  bank :  "Where  was  the 
national  bank  examiner?"  Most  likely  he  was  consulting  his  rail- 
road schedule,  seeing  how  soon  he  could  get  out  of  town,  examine 
another  bank,  and  make  another  commission. 

In  order  to  satisfy,  myself  as  to  the  length  of  time  it  would  take 
an  expert  accountant  to  do  similar  work,  I  have  asked  a  firm  of  New 
York  accountants  for  some  figures,  showing  the  time  necessary  to 
make  an  audit  of  the  accounts  of  a  bank  of  the  following  total  foot- 
ings: 

Accountants. 

$200,000.00  1 

500,000.00  1 

1,000,000.00  1 

2,500,000.00  1 

5,000,000.00  1 

10,000,000.00  1 

Of  course  this  estimate  is  only  approximate,  and  is  intended  to 
represent  the  time  it  would  take  this  firm  of  accountants  to  render 
a  report  that  would  be  satisfactory  to  themselves  and  to  the  board 
of  directors  that  hired  them  to  make  a  first  examination.  But 
owing  to  the  changes  in  the  national  bank  examiners  a  good  many  of 


Assistants. 

Time 

required 

1 

10  days 

1 

18      " 

2 

25      " 

3 

30      " 

4 

35     " 

4 

45      " 

GENERAL  BANKING  SECTION  IOI 

the  examinations  given  national  banks  are  first  examinations.  This 
first  firm  of  public  accountants  advise  me  that  the  time  would  be  con- 
siderably lowered  on  a  following  examination  if  the  first  had  occurred 
within  six  months. 

In  my  own  bank  the  national  bank  examiner  appears  on  a  Satur- 
day noon,  and  has  finished  by  the  following  Friday  afternoon.  He 
brings  no  assistant  with  him  and  appears  to  be  quite  satisfied  that 
everything  is  all  right.  I  note  that  by  the  figures  given  me  by  the 
expert  accountant,  it  would  take  one  man  and  four  assistants  forty- 
five  days  to  make  the  examination  of  a  bank  considerably  smaller 
than  the  one  of  which  I  am  an  officer.  In  Minneapolis  we  have  a 
state  bank  with  total  footings  very  similar  to  our  own,  and  in  talking 
with  the  state  department  I  find  that  they  send  two  men  to  make  this 
examination,  and  it  takes  the  two  men  three  weeks.  Whenever  I  have 
been  able  to  make  a  comparison  between  a  state  examination  and  a 
national  bank  examination,  I  have  always  found  (at  least  in  the 
state  of  Minnesota  in  the  last  four  years),  that  the  state  examination 
was  superior  to  the  national  examination.  But  as  I  believe  in  talk- 
ing only  about  those  things  that  a  person  actually  knows,  I  have  not 
attempted  to  touch  on  the  subject  of  examinations  made  by  the 
state  department.  It  is  no  doubt  subject  to  improvement,  but  I 
believe  that  in  Minnesota,  at  least,  it  is  on  a  higher  plane  than  the 
national  bank  examination.  This  is  due,  in  my  opinion,  largely  to 
one  thing,  and  that  is  that  whereas  the  national  bank  examiners  are 
on  a  commission  basis,  the  size  of  their  commission  depending  upon 
the  size  of  the  bank  that  they  examine,  the  salary  or  compensation 
of  the  state  examiner  is  fixed  by  law  at  a  certain  sum  per  year, 
putting  them  on  a  regular  salary  basis,  so  that  it  is  a  matter  of  in- 
difference to  the  state  examiner  whether  it  takes  him  one  day  or  ten 
days — he  stays  with  the  bank  till  he  is  satisfied  with  the  examination. 

It  is  time  for  the  directors  of  national  banks  in  this  country  to 
disabuse  themselves  of  the  idea  that  an  examination  by  a  government 
official  is  all  that  is  necessary  in  order  that  they  should  know,  that 
the  bank  of  which  they  arc  directors  is  in  the  condition  reported  by 
the  active  officials  of  the  bank. 

It  would  be  worse  than  idle  talk  were  a  person  to  make  the 
statements  made  above  and  propose  no  remedy.  There  are  practical 
reforms  that  can  be  adopted  in  the  present  mediaeval  bank  examina- 


102     PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

tion  which  would  materially  lessen  the  stockholder's  liability  and 
increase  the  depositor's  safety. 

First  and  foremost  the  fee  system  should  be  abolished.  The 
examiner  should  be  appointed  by  the  Comptroller  of  the  Currency 
without  any  dictation  from  political  sources,  should  be  placed  on  a 
regular  salary  basis,  and  there  should  be  enough  bank  examiners 
appointed  to  do  the  work  properly.  What  this  number  should  be 
I  would  not  even  care  to  guess,  but  I  am  absolutely  certain  that  the 
number  now  employed  is  so  small  in  comparison  with  the  number 
that  should  be  employed,  that  were  this  plan  to  be  put  into  effect, 
there  would  be  nearer  two  hundred  and  fifty  than  seventy-five. 

Secondly,  these  bank  examiners  should  be  appointed  because  they 
have  some  ability — because  they  are  fitted  for  work  of  this  kind,  and 
they  should  have  suitable  provision  made  for  assistants.  In  my 
own  bank,  not  very  long  ago,  it  took  three  expert  accountants  three 
weeks  to  do  what  it  took  a  government  examiner  less  than  one  week 
to  do.  It  is  impossible  for  a  man  to  examine  a  bank  of  any  size 
intelligently  without  taking  an  assistant  in  with  him,  for  the  reason 
that  while  the  examiner  is  examining  one  department,  the  officials, 
if  they  care  to,  can  switch  the  collateral  or  the  assets  in  such  shape 
as  to  defy  and  bewilder  the  most  astute  examiner.  This  is  avoided 
by  taking  a  requisite  number  of  men  at  the  time  the  examination  is 
started  and  practically  taking  control  of  the  bank,  when  it  is  in  a 
normal  condition. 

The  practice  of  having  the  national  bank  examiner  go  over  the 
paper  to  ascertain  its  value  with  an  officer  of  the  bank  who  made 
the  loan  is  an  absurdity.  This  is  where  the  directors'  part  in  the 
bank  should  be  made  prominent.  The  directors'  names  are  loaned 
to  banks  to  give  them  an  air  of  stability,  of  strength  ;  yet  the  directors 
sign  sworn  statements  knowing  absolutely  nothing  of  their  own 
knowledge  of  the  figures  therein  contained,  and  the  bank  examiner 
seldom,  if  ever,  consults  them  as  to  the  value  of  the  paper  represent- 
ing the  loans  of  the  bank.  In  every  examination  either  the  board  of 
directors,  or  a  committee  from  the  board  of  directors,  should  be 
called  in  by  the  national  bank  examiner ;  and  he  should  question 
them  concerning  the  value  of  the  paper,  and  not  rely  entirely  Upon 
the  statements  made  to  him  by  the  active  officer  who  made  the  loan. 
It  is  not  a  felony  for  an  officer  of  a  national  bank  to  deceive  or  lie 


GENERAL  BANKING  SECTION 


103 


to  a  national  bank  examiner,  unless  the  said  officer  is  put  on  oath. 
It  would  do  the  directors  of  a  bank  good  to  go  over  the  collateral 
personally  with  the  examiner  every  six  months.  I  know  of  no 
practical  way  in  which  they  could  keep  as  closely  in  touch  with  the 
character  and  quality  of  loans  made  by  banks  of  which  they  are 
directors  as  in  this  simple  way,  and  I  am  certain  that  it  would  add 
a  great  deal  of  value  to  the  government  examination. 

Regarding  the  signing  of  the  names  on  the  sworn  reports,  I 
doubt  if  there  are  many  directors  who  ever  take  the  trouble  to  look 
at  the  books  of  the  bank  and  satisfy  themselves  that  the  figures 
represented  on  the  statements  are  correct.  I  doubt  if  the  majority 
of  directors  in  national  banks  understand  that  the  individual  deposit 
ledgers  are  not  audited  at  all  by  the  national  bank  examiners.  The 
figures  on  the  pages  are  gone  over,  footed  up,  but  no  verification  is 
ever  asked  from  the  depositors  as  to  the  correctness  of  their  bal- 
ances. This  is  done  in  the  case  of  bank  accounts,  but  not  in  the 
case  of  individual  deposits,  nor  would  it  be  practicable  under  the 
present  way  of  doing  business  for  the  national  bank  examiner  even 
to  attempt  to  audit  the  individual  ledgers.  In  this  department  and 
in  the  collection  department  the  public  accountants  spend  most  of 
their  time — the  departments  that  arc  practically  avoided  by  the 
government  examiner.  The  usual  place  for  defalcations  to  exist 
among  bank  clerks  is  on  the  individual  ledgers.  The  temptation  is 
made  easy  by  the  use  of  the  pass  book  system.  There  is  no  more 
reason  why  a  reconcilement  should  be  taken  for  a  bank  balance  as 
to  the  correctness  of  the  amount  of  money  due  them  at  the  end  of 
any  one  month,  than  there  is  to  take  a  reconcilement  from  an  indi- 
vidual depositor.  Both  represent  money,  both  represent  trust  money. 
The  use  of  the  statement  system  on  individual  accounts  has  an 
excellent  moral  effect  on  the  force  of  the  office,  and  it  enables  the 
officers  and  directors  of  the  bank  to  know  that  the  individual  ledgers 
are  correct  and  represent  the  actual  amount  of  money  due  the  cus- 
tomers. 

The  above  are  three  practical  suggestions,  from  my  own  point 
of  view,  as  to  how  the  government  examination  can  be  bettered. 

There  are  certain  things  that  the  directors  of  banks  can  do  them- 
selves, which  would  materially  help  the  governmenl  officials;  and 
the  first  and  foremost  is  that  no  man  should  allow  his  name  to  be 


104  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

used  as  a  director  of  a  national  bank  who  does  not  intend  to  direct. 
Figureheads  are  of  no  practical  use  and  are  a  positive  detriment  in 
the  banking  business.  The  day  of  one-man  banking  is  past  in  this 
country.  No  matter  whether  a  bank  be  private,  state,  or  national, 
no  one  man  knows  it  all,  when  it  comes  to  investing  other  people's 
money.  Comparatively  few  men  make  a  success  individually  in 
investing  their  own  money.  How  then  can  one  person  be  capable 
of  investing  the  savings  and  accumulations  of  a  number  of  people? 
I  have  heard  it  stated  time  and  again  by  both  the  State  Superinten- 
dent of  banks  and  national  banks  and  the  Comptroller  of  the  Cur- 
rency, that  no  national  bank  or  state  bank  has  ever  failed  when  the 
directors  have  done  their  duty. 

Just  what  the  duty  of  a  director  is  is  a  most  important  question. 
I  am  a  firm  believer  that  what  is  left  to  five  or  ten  or  twenty  men  to 
do,  is  not  so  well  done  as  what  is  left  to  one  person.  For  that  rea- 
son I  believe  the  active  officials  in  banks  should  run  the  banks  and 
have  considerable  to  say  as  to  what  the  policy  of  the  banks  shall 
be.  I  believe  firmly  that  the  advice  and  counsel  of  five  or  ten  or 
twenty  men  is  valuable  to  any  active  official  in  the  bank,  and  ought 
to  be  sought  for  by  that  official  and  not  avoided.  In  other  words, 
I  believe  that  it  is  the  duty  of  the  directors  to  advise,  to  consult; 
that  it  is  the  duty  of  the  officers  to  carry  out  the  policy  outlined  by 
the  board  of  directors ;  and  if  that  policy  or  advice  cannot  be  fol- 
lowed consistently  by  the  officer,  then  it  is  his  duty  to  resign,  because 
it  is  the  directors  to  whom  the  depositors  are  looking  for  the  safety 
of  their  funds  entrusted  to  the  bank.  That  is  the  duty  of  the 
directors  to  the  officer,  and  of  the  officer  to  the  directors. 

The  directors  have  a  duty  to  perform  towards  themselves,  and  I 
know  of  no  way  that  they  can  discharge  that  duty  intelligently  other 
than  to  have  an  expert  examination  of  the  bank  in  which  they  are 
directors,  at  such  time  and  in  such  manner  as  they  deem  best,  with 
no  knowledge  whatever  given  to  the  active  officers  of  the  bank  as 
to  when  that  examination  shall  be  made,  and  the  report  of  said 
examination  to  be  made  to  the  directors  themselves.  This  matter 
is  one  which  simplifies  itself  according  to  the  size  of  the  bank.  The 
smaller  the  total  footings  the  simpler  the  examination,  the  easier  it 
is  for  the  directors  to  satisfy  themselves  that  everything  is  correct. 

It  is  also  the  duty  of  the  directors  to  know  whether  or  not  the 


GENERAL  BANKING  SECTION  105 

officers  of  their  banks  are  engaged  in  speculative  ventures,  and  are 
giving  more  time  to  outside  business  affairs  than  they  are  giving 
to  their  own  bank ;  for  I  believe  firmly  that  the  time  has  gone  by  in 
large  institutions,  when  it  is  possible  for  active  officials  in  banks  to 
give  their  best  attention  and  energy  and  interest  to  the  business  of 
their  bank,  if  their  attention  is  absorbed  by  their  personal  interests 
elsewhere.  Either  the  business  of  the  bank  should  be  important 
enough  and  the  remuneration  sufficient  to  attract  active  men  to  fill 
these  positions  of  trust;  or  the  officials  whose  attention  is  on  outside 
matters  should  be  permitted  to  devote  their  entire  time  to  their  own 
affairs,  without  the  annoyance  necessarily  entailed  upon  them  by 
devoting  any  attention  to  the  interests  of  the  depositors  who  are 
leaving  their  funds  with  them,  under  the  impression  that  they  are 
being  safely  looked  after. 

What  we  need  in  the  banking  business  to-day  more  than  anything 
else  is  some  old  fashioned  men,  with  high  ideas  of  honor  and  integ- 
rity; whose  minds  and  attention  are  not  all  taken  up  with  getting 
rich  quick ;  who  will  give  their  entire  attention  to  the  business  of 
running  the  bank  in  the  interests,  not  of  themselves  or  of  a  clique 
with  whom  they  happen  to  be  associated,  but  in  the  interests  of  the 
people  who  place  their  savings  with  them. 

In  conclusion  I  wish  to  state  that  while  I  believe  the  methods 
employed  by  the  government  in  examining  national  banks  should 
either  be  materially  changed,  or  the  government  examination 
abolished  altogether,  I  do  not  believe  in  shifting  one's  responsibility 
to  the  government,  as  I  am  no  believer  in  paternalism.  The  matter 
of  a  safe  conduct  of  the  national  banking  business  does  not  rest  upon 
the  government  officials ;  it  rests  upon  the  directors  in  the  national 
banks,  who  must  discharge  their  obligations  to  the  stockholders  who 
elected  them,  and  to  the  depositors  whom  they  represent,  in  an 
honorable,  businesslike,  and  up  to  date  manner. 


106    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 
WHERE    WAS   THE   BANK  EXAMINER? 

ADDRESS  DELIVERED  BY  S.  R.  FLYNN,  PRESIDENT  OF  THE  NATIONAL  LIVE  STOCK  BANK 
OF  CHICAGO,  BEFORE  THE  ILLINOIS  BANKERS'  ASSOCIATION,  AT  PEORIA,  SEP- 
TEMBER,   1902. 

The  national-bank  examiner  is  not  perfect,  but  he  is  better  than 
he  was,  and  can  be  made  better  than  he  is.  The  past  decade  shows 
vast  improvement  in  the  character  of  service  rendered  by  examiners. 
Further  improvement  is  possible  as  to  men  and  methods,  but  perfec- 
tion is  no  more  possible  in  the  field  of  government  inspection  than 
in  any  other  department  of  public  or  private  business,  where  men 
and  the  methods  of  men  prevail.  It  is  the  fashion  in  some  circles  of 
darkness  to  attribute  to  the  examiner  all  the  ills  that  result  from  bank 
failures.  In  fact,  it  is  no  exaggeration  to  say  that  there  are  some  who 
still  hold  the  opinion  that  the  national-bank  examiners  were  the 
responsible  cause  of  the  panic  of  1893.  The  question,  "Where  was 
the  national-bank  examiner?"  was  the  stereotyped  query  of  1893. 
Every  time  a  national  bank  failed  it  was:  "Where  was  the  examiner?" 
Some  presumably  intelligent  people  were  rather  inclined  to  the 
belief  that  if  the  bank  examiners  had  done  their  full  duty  there  would 
have  been  no  bank  failures,  indeed  no  panic.  If  the  national-bank 
examiner  could  perform  a  modicum  of  the  service  demanded  by 
unreasonable  critics,  it  would  be  difficult  to  compensate  him  with 
earthly  rewards,  in  cash  or  honor.  However,  earthly  reward  has 
been,  is  now,  and  always  will  be  quite  sufficient  to  compensate  the 
examiner  for  all  he  can  do  and  for  all  that  reasonable  men  will  expect 
him  to  do. 

There  was  a  time,  not  so  very  long  ago,  when  the  examiner  made 
his  report  on  a  piece  of  paper  no  bigger  than  a  postage  stamp.  In 
those  days  banks  were  not  examined ;  they  were  merely  viewed. 
Indeed,  they  were  not  always  viewed.  Not  infrequently  the  visit- 
ing examiner  arrived  and  left  on  the  same  train,  contenting  himself 
with  five  minutes'  conversation  at  the  railroad  station  with  an  officer 
of  the  bank.  The  examiner  had  wired  ahead  instructing  the  officer 
to  meet  him  at  the  train  and  to  bring  him  a  trial  balance.  There 
have  been  cases,  where  the  examiner  did  not  even  visit  the  town. 
He  made  his  examination  by  correspondence,  avoiding  the  tedium 
of  travel.  Strange  that  bankers  submitted  to  such  imposition !  But 
then,  some  of  them  did  not  want  to  be  examined,   while  others 


GENERAL  BANKING  SECTION  107 

regarded  the  examiner  as  a  necessary  political  evil.     Therefore  few 
voices  were  raised  in  protest. 

The  true  aim  and  purpose  of  an  official  examination  is  not  gen- 
erally understood.  Many  examiners  have  no  better  understanding 
of  their  duties  than  their  most  superficial  critics.  The  examiner 
is  not  supposed  to  act  as  a  detective.  Many  critics  think  him  useless 
in  any  other  capacity.  A  few  of  the  examiners,  embryo  sleuths, 
veritable  Sherlock  Holmeses,  delight  in  dark,  mysterious  methods 
in  processes  of  deduction  that  uncover  many  mare's  nests.  Some 
of  the  detective  species,  owing  to  defective  early  training,  or  natural 
brutality,  act  like  Bowery  policemen.  It  is  a  wonder  some  of  these 
are  not  thrown  into  the  streets  by  insulted  bankers.  There  is  noth- 
ing in  the  rules  and  regulations  of  the  Comptroller's  office  prohibit- 
ing an  examiner  from  being  a  gentleman  and  acting  like  one.  The 
gentleman  detective  is  not  offensive.  He  is  regarded  as  an  amusing 
diversion  by  bankers  having  nothing  to  conceal.  If  there  is  any- 
thing to  cover  up,  ample  time  is  afforded  for  concealment  while  Sher- 
lock is  deducing. 

There  are  some  examiners,  sad  to  relate,  who  seek  to  win  the 
favor  of  bankers  by  slighting  their  work.  To  express  it  bluntly, 
they  want  a  bank  job.  We  may  tell  them  with  truth  that  they  will 
never  get  one  by  show  of  leniency.  The  properly  constituted  bank 
officer  demands  a  rigid  examination.  The  properly  constituted  bank 
examiner  will  make  no  other  kind.  The  examiner  and  the  officer 
fully  realize  that  in  auditing  the  accounts  it  is  not  possible  to  do 
much  more  than  skim  the  surface.  In  examining  the  books,  the 
accounts,  the  system,  if  the  examiner  gives  the  bank  the  benefit  of 
his  broad  experience  by  suggesting  necessary  improvements,  he  has 
done  his  full  duty.  No  matter  how  rigid  an  examination,  how 
excellent  the  methods  of  an  examiner,  all  his  precautions  will  prove 
impotent  to  prevent  the  manipulations  of  a  practiced  thief.  The 
examiner  can  suggest  a  way  to  make  stealing  difficult.  He  can 
provide  you  with  safeguards,  checks,  and  counter-checks,  that  will 
render  wrong-doing  extra-hazardous,  insuring  ultimate  discovery; 
but  if  you  have  a  thief  in  the  bank,  he  will  rob  you,  despite  your 
efforts,  the  efforts  of  the  examiner,  and  despite  every  safeguard 
human  ingenuity  can  devise.  This  is  a  disheartening  truth.  So 
don't  ask,  "Where  was  the  examiner?"  when  a  defalcation  is  dis- 


ioS     PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

covered.  Perhaps,  while  not  making  the  discovery,  a  suggestion 
from  him  made  discovery  possible.  But  when  a  thief  is  discovered 
by  the  examiner,  don't  stultify  yourself,  as  many  bankers  do,  by 
rendering  the  criminal  all  possible  aid.  An  examiner  has  seldom 
made  criminal  charges  against  a  crooked  bank  officer  or  clerk  with- 
out regretting  the  action.  Usually  before  the  trial  is  at  an  end  he 
wonders  whether  he  himself  should  not  be  in  the  prisoner's  dock  in 
the  culprit's  place.  The  most  insulting,  brutal  insinuations  are 
thrown  at  him  by  the  attorney  for  the  defense,  and  the  judge  per- 
mits it.  As  a  rule,  either  the  grand  jury,  the  trial  jury,  the  prosecut- 
ing attorney,  or  the  judge,  through  mistaken  sympathy  or  ignorance, 
is  determined  to  free  the  culprit.  I  know  of  one  case  where  the 
accused  had  robbed  the  bank  for  six  consecutive  days,  using  the 
same  method  of  concealment,  and  the  judge  took  the  case  from  the 
jury,  declaring  it  might  have  been  a  "consecutive  coincidence."-  I 
shall  never  forget  that  expression.  The  criminal  was  accused  of 
robbing  his  next  employer.  I  presume  this  was  another  "consecutive 
coincidence." 

The  chief  purpose  of  an  examination  is  to  test  the  solvency  of 
the  bank  under  examination.  I  know  bankers  are  accustomed  to 
laugh  at  an  examiner's  attempt  to  estimate  values.  But  let  me  tell 
you  this :  Any  proper  examiner,  with  a  credit  head  on  his  shoulders, 
after  examining  a  city  bank  four  or  five  times,  will  have  as  good, 
if  not  better,  idea  of  the  value  of  its  assets  than  the  average  officer. 
Let  me  tell  you.  further,  that  a  first-class  examiner,  a  good  credit 
man  himself,  visiting  any  bank  for  the  first  time,  conceding  that 
his  questions  are  answered  truthfully,  will  make  an  estimate  of  value 
more  nearly  correct  than*  the  man  who  made  the  loans. 

The  examiner  of  to-day  who  does  his  duty  does  not  have  a 
sinecure.  He  comes  to  a  bank  unannounced.  He  takes  complete 
charge  of  the  assets,  holding  them  until  he  has  checked  them,  and  yet 
not  in  the  slightest  degree  interfering  with  the  business  of  the  bank. 
He  proves  the  cash.  He  lists  and  proves  the  loans  and  discounts, 
the  collaterals,  the  stocks  and  securities,  other  real  estate  and  loans 
secured  by  real  estate.  He  takes  the  trial  balance  and  checks  it. 
He  balances  the  ledgers,  proves  all  the  registers.  Then  comes  the 
hardest  task,  if  he  is  a  conscientious  man — formulating  data  for  his 
report.     He  has  the  trial  balance,  and  this  forms  a  part  of  his  report. 


GENERAL  BANKING  SECTION  109 

Then  he  lists  the  directors,  with  their  direct  and  indirect  liabilities ; 
the  officers  and  clerks,  with  their  direct  and  indirect  liabilities.  He 
reports  on  the  character  and  capacity  of  the  management.  He 
describes  the  system  of  accounting-.  The  loans  and  discounts  are 
segregated  into  five  classes.  Over-loans  are  listed  and  described. 
Past-due  paper  is  segregated  from  live  paper,  divided  into  two 
classes  and  described.  Overdrafts  are  criticised.  The  state  of  the 
reserve  is  given.  Securities,  other  real  estate,  and  mortgage  loans 
are  listed  with  their  book  and  market  or  estimated  values.  The 
deposits  are  analyzed.  Habits  of  borrowing  are  stated.  Then 
comes  a  general  statement  showing  the  condition  of  the  bank.  An 
estimate  of  the  value  of  assets  is  made,  and  if  an  impairment  devel- 
ops, an  assessment  is  recommended.  Values  are  ascertained  in  the 
way  common  to  bankers. 

The  report  can  now  go  forward,  but  the  examiner's  task  is  not 
at  an  end.  Statements  have  been  sent  to  correspondent  banks  for 
reconcilement  and  report  to  the  examiner.  Items  in  transit  are 
being  checked  by  correspondence.  All  these  reports  have  to  be 
checked.  Then  there  is  his  line-book.  The  city  examiner  keeps  a 
record  of  the  aggregate  of  the  paper  of  different  concerns  carried! 
by  the  banks  on  his  list. 

If  a  bank  examiner  does  his  duty — and  most  of  them  do — who 
will  say  his  position  is  a  sinecure? 

While  a  city  examiner  has  more  work  to  do  than  his  country 
brother,  he  can  feel  better  satisfied  with  results.  He  has  a  distinct 
advantage  in  estimating  values.  He  has  a  distinct  advantage  in 
checking  bank  accounts.  The  country  examiner  cannot  very  well 
send  out  bank  statements  for  reconcilement.  Under  present  con- 
ditions he  is  compelled  to  use  the  foolish  little  circulars  provided  by 
the  Comptroller's  office.  It  is  absolutely  impossible  to  reconcile  an 
active  bank  account  with  one  of  these.  There  was  an  examiner  who 
claimed  he  reconciled  accounts  to  a  cent  with  these  circulars,  but 
that  examiner  has  not  had  a  credit  balance  on  St.  Peter's  books 
since.  One  banker,  whom  I  had  evidently  annoyed  by  frequently 
sending  him  one  of  these  circulars,  returned  one  without  any  infor- 
mation other  than  the  following  communication: 

This  report  docs  not  pive  us  one  cent  worlh  of  benefit.  Tf  die  examiner 
would  send  us  a  report  of  the  result  of  this  report  with  the  banks  in  question, 


HO    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

also  give  us  a  guarantee  report  of  the  condition  of  these  banks  after  their 
examination,  the  examiner  to  give  a  good  bond  to  reimburse  the  outside 
bankers  in  case  of  failure  of  the  bank,  I  would  be  willing  to  concede  to  give 
reports  every  day  or  month;  hut  as  it  is,  it  is  only  a  scheme  for  a  few 
people  to  draw  salary  without  benefit  to  the  class  intended. 

This  is  given  verbatim  ad  literatim. 

The  present  examination  covers  the  ground  very  thoroughly. 
If  the  examination  made  is  not  complete,  you  may  be  sure  the 
examiner  has  not  followed  instructions.  If  an  examiner  merely 
carries  out  instructions,  he  will  give  an  examination  as  nearly  per- 
fect as  may  be  under  existing  conditions.  The  same  methods  would 
give  better  results  if  more  time  were  devoted  to  their  application. 
This  is  generally  conceded,  and  the  recommendation  that  examiners 
be  placed  upon  a  salary  basis  has  been  frequently  made.  Perhaps 
it  has  never  been  adopted  because  it  is  so  palpably  worthy  of  adop- 
tion. More  time  should  be  devoted  to  examinations,  but  an  examiner 
cannot  be  justly  blamed  for  not  giving  this  time  at  his  own  cost. 
Many  examinations  are  now  made  at  a  cash  loss  to  the  examiner. 
Give  the  examiner  salary  and  expenses,  and  let  him  use  present 
methods,  and  he  will  show  you  results  that  will  amply  offset  any 
additional  expense.  For  instance,  now  that  statements  of  individual 
accounts  are  kept  up  to  date,  they  could  be  checked  just  as  bank 
statements  are.  The  country  examiner  could  check  individual 
accounts  and  correspondent  bank  accounts,  just  as  the  city  exam- 
iner now  checks  the  bank  accounts. 

But  if  these  precautions  were  taken,  what  protection  would  they 
afford  against  a  confederate  depositor?  And  it  is,  "Where  was  the 
bank  examiner?"  when  we  hear  that  a  clerk  and  a  depositor  have, 
by  their  joint  effort,  succeeded  in  robbing  a  bank.  But  there  is 
one  comforting  thought  that  may  be  cherished  by  the  much-maligned 
bank  examiner.  No  accountant  asks,  "Where  was  the  bank  exam- 
iner?" The  query  comes  from  those  who  do  not  know  the  difference 
between  a  ledger  and  a  coal  scuttle.  The  expert  accountant  knows 
how  easy  it  is  to  manipulate  accounts  so  as  to  fool  another  expert 
accountant,  and  he  is,  therefore,  humble.  He  is  slow  to  criticise 
another  accountant.  The  ever-ready  critic,  however,  never  lets 
facts  worry  him.  Xor  is  he  at  all  concerned  about  his  inconsis- 
tencies. The  Monetary  Commission  gives  an  illustration  of  the 
pitfalls  in  the  way  of  the  unthinking  critic.     On  page  357  of  the 


GENERAL  BANKING  SECTION  III 

commission's   voluminous   and   valuable   report   may   be   found   the 
following : 

At  present  the  ordinary  examinations  are  largely  formal  and  of  little 
value  so  far  as  any  real  indication  of  the  character  of  the  discounts  is  con- 
cerned. Being  made  by  persons  who  are  strangers  to  the  locality,  and  hence 
unfamiliar  with  the  business  paper  of  the  place,  they  cannot  afford  any  im- 
portant information  as  to  the  real  situation  of  the  banks. 
Look  on  that   statement,  and  then  on   this,  printed  on  page  360 : 

The  rumors  that  examiners  ask  and  receive  honorarium  suggests  a  state 
of  things  inconsistent  with  accurate  examinations,  and  there  is  opportunity 
for  other  abuses  of  the  same  sort  which  should  be  corrected.  The  commis- 
sion has,  therefore,  recommended  that  bank  examiners  be  paid  adequate 
fixed  salaries,  according  to  some  uniform  rule,  thus  avoiding  all  excuse  for 
the  payment  of  additional  emoluments  by  banks  to  examiners.  It  has  been 
suggested  that  the  loaning  of  money  by  banks  to  examiners  be  forbidden 
under  penalty,  and,  to  avoid  as  far  as  possible  the  risk  of  violation  of  the  law, 
that  the  examiners  be  assigned  to  banks  in  rotation. 

An  examiner,  a  stranger  to  the  locality,  being  unacquainted  with 
the  business  paper  of  the  place,  "cannot  afford  any  important  infor- 
mation as  to  the  real  situation  of  the  banks ;"  therefore,  rotate  the 
examiners.  That  is  absolutely  funny.  To  prevent  dishonest 
examiners  and  dishonest  bankers  from  being  dishonest,  destroy  the 
efficiency  of  honest  examiners  and  deprive  honest  bankers  of  the 
protection  afforded  by  a  proper  examination. 

The  unwarranted  attack  upon  the  honor  of  the  examiners  I  have 
just  quoted  would  be  treated  with  the  contempt  it  deserves,  were  it 
not  given  such  high  endorsement.  The  examiner  has  reason  to  feel 
proud  of  the  record  of  his  associates  during  the  past  decade.  The 
average  members  of  the  Monetary  Commission  were  inspired  by 
patriotic  purpose,  but  in  no  higher  degree  than  the  average  examiner. 
There  have  been  unworthy  bank  examiners.  I  believe  there  have 
been  unworthy  college  professors ;  but  the  examiner  is  not  prepared 
to  condemn  all  college  professors,  nor  to  recommend  that  they  be 
rotated  from  chair  to  chair  because  a  few  of  their  number  have 
sinned. 

The  efficiency  of  the  examiner  can  be  increased  by  giving  him 
salary  and  expenses,  but  not  by  rotation.  Every  examiner  and 
every  banker  knows  that  no  man  can  make  a  satisfactory  report  on 
the  assets  of  a  bank  before  his  third  or  fourth  examination.  At  the 
moment  he  could  make  a  good  examination,  the  commission  would 


uj     PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

move  him  to  another  district.     Such  a  recommendation  is  ridiculous. 
No,  do  not  rotate  dishonest  or  inefficient  examiners — discharge  them. 

Politics  should  be  a  stranger  in  the  Comptroller's  office.  The 
efficiency  of  the  service  has  been  greatly  increased  by  the  partial 
elimination  of  politics  from  its  operations.  The  service  would  be 
still  more  efficient  if  politics  were  wholly  eliminated.  Every 
appointment  from  comptroller  down  should  be  based  solely  on 
merit.  The  Comptroller  should  be  a  man  of  ripened  judgment,  the 
possessor  of  demonstrated  common-sense,  or  he  should  be  a  brilliant 
find.  The  examiners  should  be  men  of  broad  experience,  or  none 
at  all.  There  is  no  place  on  this  force  for  narrowness,  developed 
or  undeveloped.  The  tenure  should  be  good  behavior  and  efficient 
service.  The  salaries  should  be  sufficiently  large  to  anchor  men  of 
average  ability  to  the  positions. 

There  should  be  two  supervising  examiners.  The  clerk  in 
charge  of  the  reports  division  should  not  be  a  clerk — he  should  be 
chief  of  examiners.  He  should  have  had  experience  as  an  examiner, 
and  he  should  know  as  much  as,  if  not  more,  than  the  average  exam- 
iner in  the  field,  and  he  should  receive  full  cash  value  for  his  knowl- 
edge. Much  of  the  best  work  of  the  examiners  goes  to  waste  because 
it  is  never  viewed  by  intelligent  eyes.  The  significance  of  important 
information  is  not  appreciated,  and  therefore  is  not  called  to  the 
personal  attention  of  the  Comptroller.  Mishaps  that  might  have 
been  avoided  follow,  and  the  examiner  suffers  personal  humiliation 
and  public  condemnation  in  consequence.  It  may  be  asserted,  with- 
out fear  of  successful  contradiction,  that  the  reports  of  the  Comp- 
troller's examiners,  excepting  a  very  few  of  the  examiners,  present 
the  condition  of  banks  with  faithful  accuracy.  If  properly  analyzed 
and  promptly   acted  upon,  many  bank  troubles  might  be   averted. 

In  this  connection,  however,  bear  in  mind  the  grave  responsibility 
resting  upon  the  Comptroller's  shoulders.  It  is  easy  to  recommend 
closing  a  bank,  but  his  action  is  final  and  he  must  be  sure  he  is  right 
before  going  ahead.  You  know  the  mere  act  of  closing  a  bank's 
doors  causes  a  shrinkage  in  the  value  of  its  assets.  Therefore,  the 
Comptroller  is  not  likely  to  order  the  closing  until  it  becomes  abso- 
lutely necessary.  The  public  will  never  know  how  many  lame  and 
halting  institutions  have  been  restored  to  health  and  vigor  by  the 
efforts  of  the  Comptrollers  and  their  assistants.     The  public  hears 


GENERAL  BANKING  SECTION  1 13 

of  the  lost  banks  only.  The  public  seldom  knows  that  a  bank  is  in 
bad  condition  until  all  efforts  of  the  Comptroller's  office  to  save  it 
have  failed.  And  remember  this,  that  no  matter  how  skillful  the 
Comptroller  and  his  assistants,  they  cannot  prevent  inefficient  officers 
from  making  bad  loans ;  they  cannot  stand  at  the  elbow  of  the  loan 
man  during  every  minute  of  the  business  day ;  they  cannot  prevent 
a  dishonest  officer  or  clerk  from  stealing,  for  they  cannot  pick  out 
prospective  thieves  and  watch  them  night  and  day.  Bad  loans  and 
steals  may  be  discovered,  but  they  cannot  be  prevented. 


SUPERVISION  AND  PUBLICITY 

ADDRESS  DELIVERED  BY  J.  A.  S.  POLLARD,  CASHIER  OF  THE  FORT  MADISON  SAVINGS 
BANK,  FORT  MADISON,  IOWA,  BEFORE  THE  MISSOURI  BANKERS'  ASSOCIATION 
AT    KANSAS    CITY,    MAY,    1905. 

We  have  heard  much  talk  about  such  national  regulation  and 
supervision  of  railroads,  which  have  become  national  in  their  influ- 
ence and  operations,  as  will  render  justice  to  shippers,  big  and  little. 
There  is  a  demand  for  federal  supervision  of  the  life  insurance 
companies  in  which  such  immense  sums  belonging  to  the  people  are 
invested.  I  see  no  danger  to  free  institutions  in  federal  regulation 
of  rates  charged  by  the  great  public  utilities ;  and  why  any  institu- 
tion, be  it  life  insurance  company,  trust  company,  or  private  bank, 
asking  for  the  unrestricted  investment  of  the  public  dollars,  should 
not  have  every  safeguard  of  legislation  which  experience  has  proved 
conducive  to  the  interest  of  bank  depositors,  is  beyond  the  compre- 
hension of  a  few  million  citizens  who  claim  to  possess  average 
intelligence.  As  a  rule  banks  are  under  supervision  of  either  national 
or  state  authority;  all  of  them  should  be  under  legal  regulations,  for 
they  are  to  some  extent  public  institutions  for  the  custody  of  the 
pie's  credit.  The  bank's  charges  are  regulated  by  state  laws 
with  penalties  for  excessive  rates.  It  is  eminently  right  that  the 
banks  should  be  under  supervision  and  regulation,  and  there  is  no 
sound  reason  why  immense  corporations,  doing  a  larger  business 
than  any  bank,  reaching  in  their  scope  not  merely  a  limited  list  of 
depositors,  but  practically  the  entire  population  of  the  country,  should 
8 


II  1    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

not  be  required  to  take  the  three  degrees  of  supervision,  cash  capital, 
and  publicity,  and  ride  the  same  legislative  goat  so  familiar  to  the 
banking  fraternity. 

The  greatest  value  of  supervision  by  official  legislative  authority, 
is  in  the  publicity  entailed.  Publicity  is  one  of  the  greatest  modern 
remedies  for  financial  ills.  It  is  only  another  name  for  commercial 
information,  and  few  banks  have  ever  suffered  losses  which  might 
not  have  been  avoided  by  complete  and  accurate  information.  It  is 
the  handmaiden  of  public  opinion;  it  prepares  the  way  and  makes 
effective  our  great  governing  force. 

The  lazy  man  was  directed  by  high  authority  to  visit  the  ant  and 
learn  the  lesson  of  industry,  and  the  man  who  fears  publicity  can  be 
escorted  to  the  bank  where  a  working  model  of  publicity  is  in  suc- 
cessful operation  without  revealing  any  craft  secrets. 

Had  the  trusts  and  combinations  been  subjected  to  the  same 
publicity,  inspection  and  supervision  as  the  bank,  many  of  those 
which  have  caused  our  financial  equilibrium  to  wobble  at  times 
would  never  have  been  able  to  float  their  securities  on  the  troubled 
sea  of  commerce.  Both  nation  and  state  demand  the  right  to  super- 
vise and  regulate  the  banking  business,  and  what  we  need  to  sepa- 
rate the  good  trust  from  the  bad  is  the  same  magnifying  glass,  tests, 
and  scales  as  are  now  employed  with  banking  institutions. 

I  should  have  said — with  the  majority  of  banking  institutions, 
for  in  some  of  our  states,  with  excellent  laws  governing  state  banks 
and  the  national  banks  of  course  under'  federal  supervision,  the; 
solons,  through  utter  lack  of  legislation  governing  private  banks, 
have  held  out  chromos  to  the  men  who  chose  to  compete  with  legally 
supervised  banks  without  subjecting  themselves  to  any  of  their 
restrictions.  The  supervision  or  regulation  of  private  banks  has 
been  the  subject  of  considerable  discussion  and  comment  lately,  par- 
ticularly in  the  West,  and  bankers  in  every  state  should  realize  that 
it  is  the  concern  of  bankers  everywhere  to  have  every  institution  con- 
ducting a  regular  banking  business  under  proper  supervision  and 
publicity  ;  for  a  lack  of  controlling  legislation  too  frequently  gives 
the  opportunity  for  improper  banking,  and  improper  banking  hurts 
business  in  every  state.  It  disturbs  the  principle  of  faith  in  human- 
ity, that  credit  which  is  the  basic  principle  of  the  grand  action  we 
call  business — the  scientific  direction  of  profitable  human  energy. 


GENERAL  BANKING  SECTION  1 15 

In  Iowa,  if  a  private  banker  choses  to  do  business  without  cap- 
ital, or  advertises  more  capital  than  he  has,  he  is  regarded  as  an 
enterprising  citizen.  If  a  banker  governed  by  state  law  does  the 
same  thing,  he  goes  to  the  penitentiary.  If  a  private  banker  owns 
enough  government  bonds,  and  often  even  if  he  doesn't,  he  can 
escape  all  taxation,  but  the  state  banker  has  not  that  privilege.  If 
the  private  banker  wants  to  please  his  farmer  friends  by  carrying 
their  loans  in  the  shape  of  over-drafts — and  nothing  pleases  an  Iowa 
farmer  so  much  as  to  be  able  to  say,  "I  can  write  my  check  on  a 
shingle  and  the  bank  will  pay  it  if  I  haven't  a  cent  to  my  credit"  he 
has  no  one  to  question  him ;  but  if  the  national  or  state  banker  does 
that  he  gets  censure  from  the  authorities.  If  the  private  banker 
wants  to  loan  everything  he  has  in  the  bank  to  an  individual,  or 
invest  in  real  estate  or  mortgage  his  safe,  he  can  do  so;  but  the 
supervised  bankers  have  legal  restrictions  ;  so  that  by  subjecting  your- 
self to  the  excellent  state  and  savings  bank  laws  of  Iowa  you  are 
denied  a  dozen  rights,  both  valuable  and  questionable,  which  the 
private  banker  possesses,  and  you  pay  the  expense  of  incorporation, 
examination,  taxation,  and  published  statements  for  the  privilege  of 
getting  a  legislative  "double  cross." 

Gentlemen,  I  believe  in  personal  liberty  and  am  too  mean  a 
democrat  to  advocate  strong  federal  control  and  centralization  of 
financial  power  in  government ;  but  I  am  with  those  who  are  jealous 
of  forfeiting  commercial  liberty  for  an  equally  dangerous  brand  of 
financial  concentration  ;  that  is,  leaving  our  vast  inheritance  of  wealth 
unrestrictedly  in  the  hands  of  a  few  men  whose  minds  are  warped 
and  diseased  by  an  uncontrollable  craze  for  large  footings,  and  I  do 
believe  in  the  government  taking  a  hand  wherever  necessary  to  ad- 
minister justice;  that  both  state  and  nation  should  exercise  the  police 
power  over  us  impartially  and  enforce  the  laws  rigidly.  I  believe 
the  individual  citizen  has  the  right,  if  he  is  persistent  and  his  friend 
is  indifferent,  to  borrow  all  the  money  he  can — it's  none  of  our  busi- 
ness, provided  it  is  obtained  without  misrepresentation  and  not 
loaned  in  ignorance ;  but  I  am  just  as  positive  that  from  the  com- 
mercial discounts  of  the  East  to  the  cattle  paper  of  the  West,  from 
Minnesota  warehouse  receipts  to  the  southern  cotton-bills,  every 
man  desiring  to  handle  the  people's  funds  as  a  banker  should  be 
subjected  to  examination,  supervision,  and  regulation  and  required 


i  10  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

to  publish  sworn  statements  for  the  information  of  those  who  entrust 
their  hard  earned  dollars  to  him  for  the  safety  and  convenience 
which  the  common  acceptance  of  the  word  "Bank"  seems  to  promise. 

I  do  not  wish  to  reflect  upon  the  honest,  well-meaning  and  unin- 
spected private  banker  whose  sterling  integrity  and  personality 
enable  him  to  obtain  the  people's  deposits  without  the  capital  nor 
upon  the  really  responsible  unsupervised  banker  who  does  a  safe 
business  and  whose  only  objection  to  regulation  and  publicity  is 
that  he  has  been  handling  the  people's  credit  so  long  and  so  inde- 
pendently that  he  has  come  to  regard  it  as  his  own,  and  hates  to  be 
bothered ;  but  I  maintain  the  principle  is  sound,  that  the  safe- 
guards of  legislation — safeguards  which  have  shown  in  hard,  cold 
statistics  that  supervision  and  publicity  mean  fewer  failures  and  even 
in  occasional  failures  more  ultimate  return  to  creditors, — that  these 
safeguards  should  in  every  instance  be  afforded  the  public  which 
must  entrust  its  credit  to  the  banker,  and  that  no  man  should  be 
permitted  to  hang  out  the  sign,  "Bank,"  who  is  not  willing  to  expe- 
rience a  friendly  visit  from  a  competent  examiner  and  swear  to  and 
publish  reports  of  the  condition  of  his  institution.  In  my  state  a 
private  banker  cannot  use  the  words  "Savings"  or  "State"  any  more 
than  he  can  the  name  "National,"  and  there's  an  obvious  intent  that 
the  public  must  not  be  deceived  into  thinking  that  he  is  running  a 
bank  under  state  supervision.  For  practically  the  same  reason  he 
ought  not  to  be  permitted  to  use  the  more  important  and  more 
easily  misunderstood  title  "Bank,"  under  the  present  lack  of  govern- 
ing laws.  This  is  a  free  country,  I  admit,  but  if  one  desires  to  do 
business  without  supervision,  publicity  or  legal  restraints,  there  are 
various  avenues  of  trade  and  commerce  open  with  only  the  common 
law  to  interfere. 

Your  ordinary  citizen  would  not,  if  he  knew  it,  shoot  skyward 
in  an  elevator  which  had  not  been  inspected  by  a  qualified  examiner 
and  had  not  a  published  report  of  its  condition  hung  up  in  the 
cage ;  he  would  not  sit  peacefully  in  his  office  if  he  knew  that  just 
below  him  was  an  uninspected  boiler  and  nothing  standing  between 
him  and  eternity  but  the  personal  responsibility  oi  the  landlord;  but 
that  same  citizen  will  see  the  gold  emblazoned  name  "Bank"  and 
with  no  other  information  than  the  sign,  and  perhaps  an  acquaintance 
with  some  one  inside,  he  will  give  up  the  product  of  his  toil  and 


GENERAL  BANKING  SECTION  117 

saving;  his  hope  of  comfort  and  support  for  future  years.  We 
are  often  met  with  the  stock  argument  that  the  private  banker  should 
not  be  subjected  to  inspection  and  publicity  for  the  reason  that  his 
individual  responsibility  is  behind  his  institution.  It's  a  grand  idea, 
that,  but  without  legal  examination  of  both  bank  and  personal  re- 
sponsibility how  do  you  know  that  the  latter  will  be  available  when 
you  have  to  realize  on  it? 

At  one  of  the  bankers'  conventions  held  last  fall,  the  governor  of 
the  state,  in  speaking  of  proposed  legislation  for  the  supervision  of 
private  banks,  stated  that  he  was  himself  a  private  banker  and 
advised  the  representatives  of  banks  under  legal  regulation  first  to 
perfect  a  system  of  examination  before  they  preached  the  doctrine 
to  the  private  banker;  that  he  had  read  of  too  many  failures  just 
after  examination  certificates  had  been  furnished,  etc.,  etc.  Admit- 
ting that  he  was  absolutely  right  about  the  necessity  for  more  per- 
fect bank  examinations,  what  did  the  man  mean  by  the  rest  of  it? 
Do  supervised  banks  in  his  state  have  to  try  the  ice  before  the  com- 
mercial lives  of  the  private  banks  are  to  be  risked  upon  the  frozen 
pond  of  commerce?  This  was  in  another  state,  but  is  there  anything 
sacred  about  a  private  banker  from  Iowa,  for  instance?  Is  he 
anointed  by  divine  right  for  the  purpose  of  handling  trust  funds  or 
receiving  deposits  that  he  should  be  allowed  to  pursue  the  broad  and 
easy  path  of  unrestricted  banking  which  sometimes  leads  to  a 
receiver,  while  the  inspected  and  supervised  "banks"  are  fighting  out 
the  details  of  bank  examination  through  the  centuries?  If  any 
experimenting  is  to  be  done,  if  problems  are  to  be  solved,  by  all 
means  let  us  have  our  esteemed  competitors,  the  private  bankers,  in 
school  with  us.  We  can  study  better  if  we  do  not  have  to  look  out 
of  the  window  and  see  them  having  a  good  time  diving  in  some 
financial  swimmin'  hole  or  chasing  the  butterflies  and  gathering  the 
daisies  of  uncertain  profit  without  restraint. 

While  there  is  plenty  of  just  criticism  relative  to  the  sufficiency 
of  bank  examinations,  both  state  and  national,  it  can  hardly  be 
denied  that  they  accomplish  some  good.  We  do  not  know  how 
many  lives  are  saved,  for  instance,  through  boiler  inspection,  and  it 
is  an  unwritten  chnptcr  how  many  million  dollars  have  been  saved 
to  depositors  and  stockholders  of  bank  institutions  through  super- 
vision.    We  are  sure  to  hear  of  the  inspected  boiler  or  the  inspected 


1  [8  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

hank  going  up  in  the  air;  it's  a  news-item  when  the  trusted  hank 
president  goes  wrong  through  speculation,  but  it  is  not  very  good 
logic  to  condemn  inspection  or  trust  on  account  of  these  exceptions ; 
besides,  there  is  no  guess  work  about  the  merit  in  bank  examination 
— the  records  prove  it  conclusively.  Bank  examinations  can  be 
made  more  effective.  Nothing  will  guarantee  the  honesty  of  a 
trusted  official,  but  his  time  of  speculation  can  be  limited  and  fraud 
can  be  made  a  very  difficult  and  thorny  path  by  perfecting  the  sys- 
tem. 

In  the  interest  of  general  commercial  stability  what  bank  would 
object  to  paying  three  or  four  times  the  present  cost  of  examinations 
to  have  them  made  thorough,  efficient  and  sufficient?  No  better 
investment  could  be  made,  and  we  shall  see  the  day  when  the 
examiner  will  stay  with  a  bank  long  enough  to  be  able  to  give  a 
reliable  bill  of  financial  health,  and  when  his  field  will  be  so  limited 
that  he  can  obtain  accurate  information  as  to  the  value  of  the  secu- 
rities listed.  It  will  be  a  long  step  in  progress  when  the  directors 
will  be  required  to  go  over  the  notes  and  securities  with  the  exam- 
iner. Some  of  our  captains  of  industry  who  are  directors  in  a 
dozen  large  banks  would  not  have  the  time  to  do  this,  a  fact  which 
is  positive  proof  that  they  should  not  be  figureheads  in  so  many 
institutions.  In  the  perfection  of  the  business  of  banking  the  duty 
of  the  director  becomes  more  prominent,  and  his  fulfillment  of  that 
duty  more  and  more  essential.  One  of  the  greatest  evils  of  the 
system  of  banking  is  that  directors  will  accept  the  responsibility  of 
their  important  officers  and  in  spite  of  the  requirements  of  law  and 
business  methods,  leave  a  president  or  a  cashier  to  conduct  a  "one- 
man  bank,"  until  the  officer  becomes  a  moss-back,  imbued  with  the 
idea  that  the  bank  is  his  personal  property,  and  one  who  actually 
resents  inquiry  instead  of  being  glad  to  divide  the  responsibility 
with  those  to  whom  a  large  share  belongs — the  board  of  directors. 

Neither  can  I  understand  why  men  of  probity  and  ordinary  busi- 
ness sagacity  will  so  far  forget  the  sacred  trust  reposed  in  them  as 
directors  of  banking  institutions,  will  so  far  neglect  their  duty  to  the 
community,  their  friends  and  neighbors,  as  to  permit  some  bank 
officer  to  have  such  freedom  in  management  as  to  receive  from  his 
lips  the  wretched  confession  that  the  bank's  accounts  contain  false 
entries ;  that  he  has  organized  a  regular  system  of  dishonesty  among 


GENERAL  BANKING  SECTION  1 19 

subordinates;  that  hundreds  of  thousands  of  dollars  have  been 
appropriated  under  their  very  eyes;  that  the  funds  for  which  they 
are  responsible  legally  and  morally  have  been  stolen  while  they 
were  complacently  admiring  their  own  names  prominently  displayed 
on  statement  folders. 

I  have  for  some  time  had  the  idea  that  we  might  also  go  higher 
up  in  perfecting  the  safety   appliances  of  banking.     Again   using 
my  native   state   as  an  example,   some  one   willing  to  serve  as   a 
national  bank  examiner  must  be  unearthed.     I  do  not  hesitate  to  say 
that  qualifications  of  experience,  knowledge  and  ability  would  have 
no  weight  whatever  against  political  pull,  in  the  appointment  of  a 
national  bank  examiner  in  the  state  of  Iowa,  and  I  believe  it  is  the 
custom  of  the  Comptroller  of  the  Currency  to  make  appointments  in 
every  state  according  to  the  recommendations  of  either  the  senators 
or  the  entire  congressional  delegations.     Again,  in  the  vicissitudes 
of  politics,  suppose  that  the  wrong  man  should  be  appointed  at  the 
head  of  bank  supervision.     Imagine  an  incompetent  or  dangerous 
financier  in  the  office  of  Comptroller  of  the  Currency  or  auditor  of 
state.     We  have  always  been  fortunate  in  having  a  capable  govern- 
ment servant  in  charge  of  national  bank  supervision,  but  it  has  in 
at  least  one  instance  happened  more  by  a  fortunate  chance  than  as 
the  result  of  thought  and  deliberation.     When  one  remembers  the 
vast  interests  under  the  regulations  of  that  office  and  the  fact  that 
the  enforcement  of  some  of  the  wise  provisions  of  the  national  bank 
act  is  hampered  by  the  want  of  means  and  penalties,  is  it  unreason- 
able to  suggest  that  a  commission,  chosen  for  its  knowledge  of  good 
banking  and  of  high  individual  integrity,  removed  from  politics  and 
with  all  the  force  and  dignity  of  our  Supreme  Court,  with  authority 
to  appoint  skilled  examiners  and  power  to  enforce  the  letter  and 
spirit  of  the  law,  would  be  none  too  important  for  the  interests  under 
its  control?     When  we  want  t<>  dig  a  canal  we  look  for  hundred- 
thousand-dollar  competency,  and  if  it  is  not  to  be  found  we  get  along 
with    several    twenty-five    thousand    dollar   engineers;  but   when    it 
comes  to  opening  and  maintaining  that  most  important   canal  of 
business  confidence,  through  which   flows  the  credit  of  the  nation, 
the  life-giving  stream  of  commerce,  we  hand  oul  a  title  and  a  pros- 
pect of  possible  political  advancement  or  an  ultimate  paying  job  with 
a  city  bank. 


120    PRACTICAL  PROBLEMS  IN  RANKING  AND  CURRENCY 

Some  of  our  banking  institutions  arc  getting  pretty  large,  and 
the  great  concentration  of  banking  power  has  brought  with  it  an 
increasing  investment  of  the  people's  deposits  in  speculative  secu- 
rities and  a  diminishing  proportion  of  investments  in  legitimate 
commercial  loans.  The  dangers  of  our  great  banks  tending  toward 
the  promoting  finance  company  rather  than  the  bank  of  deposit  and 
discount,  and  the  temptations  following  great  financial  power  to 
the  officers  of  those  institutions,  are  before  us.  A  commission 
which  would  carry  all  the  prestige,  weight  and  importance  of  our 
Supreme  Court  is  needed  to  hold  down  the  great  bankers  to  the 
strict  regulations  of  law  and  the  requirements  of  safe  commercial 
banking,  for  they  are  in  a  measure  a  part  of  that  limited  body  of 
men  suffering  from  the  "get-big-quick"  mania  whose  power  has 
become  so  vast  that  there  is  a  live  popular  demand  for  commissions 
to  control  them  in  other  walks  of  trade  and  commerce. 

The  public  is  justified  in  demanding  not  only  that  every  insti- 
tution which  accepts  deposits  under  the  sacred  name  of  bank — the 
emblem  of  confidence  and  credit — should  be  under  proper  legislative 
control  and  subject  to  examination  and  efficient  supervision,  but  that 
every  bank  now  under  such  legal  restrictions  should  be  subject  to 
such  stringent  enforcements  of  its  requirements  as  will  compel  it 
to  do  a  legitimate  banking  business — not  a  speculative  or  "stock 
washing"  business — and  to  carry  out  the  proper  functions  of  bank- 
ing. If  anything  short  of  the  most  effective  control,  examination 
and  supervision  possible  to  enforce  were  contemplated,  far  better 
for  those  institutions  already  under  supervision  to  let  state  and  nation 
keep  hands  off  the  private  bank  now  running  without  legal  restric- 
tions. Anything  short  of  wise  and  thorough  regulation  would  mean 
the  throwing  of  the  cloak  of  legal  sanction  around  such  to  the  detri- 
ment of  banks  now  profiting  through  the  confidence-accorded  state, 
national  and  properly  supervised  private  banking  institutions — ■ 
where  the  public  happens  to  think  and  discriminate. 

We  have  come  to  a  passage  in  our  national  career  where  clear 
minds,  stout  hearts  and  strong  hands  are  required  to  guide  the  ship 
of  state  between  the  rocks  of  socialism  and  the  reef  of  business! 
autocracy;  the  very  safety  of  our  republican  institutions  depends 
upon  control  of  the  rudder  and  the  constancy  of  the  brilliant  search- 
light of  publicity.     We  will  come  through  safely,  God  grant,  but 


GENERAL  BANKING  SECTION  121 

this  is  not  the  time  to  blink  at  dangers  that  threaten ;  not  the  time 
to  dismiss  them  with  a  flippant  word  as  to  government  interference, 
commercial  independence  and  the  evils  of  too  many  laws. 


THE  EVOLUTION  OF  THE  BANKING  LAW 

ADDRESS    DELIVERED    BY    THOMAS    B.    PATON,   EDITOR   OF   THE   "BANKING   LAW   JOUR- 
NAL,"  BEFORE  THE    MISSOURI   BANKERS'   ASSOCIATION   IN    MAY,    IOX)2. 

It  has  seemed  to  me  that  one  of  the  things  which  might  claim 
some  small  share  of  attention  is  the  subject  of  the  laws  which 
govern  business  dealings ;  not  so  much  the  laws  which  govern  the 
organization  and  powers  of  banking  corporations  as  those  laws 
which  govern  the  instruments  of  trade  in  which  bankers  deal,  the 
bills,  notes,  checks,  and  other  instruments  representing  money,  and 
the  documentary  securities  representing  property  values,  which  con- 
stitute the  bone  and  sinew  of  the  mercantile  wealth  of  the  country, 
and  which  it  is  the  peculiar  office  of  the  banker  to  deal  in  and  to 
make  effective.  It  is  concerning  the  laws  which  govern  these  in- 
struments of  trade,  as  well  as  the  laws  which  govern  the  acts  of  the 
banker  as  the  agent  of  commerce — how  these  laws  have  grown  up 
and  been  developed,  their  present  condition,  and  how  they  are  ap- 
plied and  enforced  in  the  various  states  of  this  great  American 
Union — whether  they  are  entirely  satisfactory  as  they  now  exist,  or 
whether  there  is  room  for  improvement — upon  which  I  desire  to 
submit  a  few  remarks. 

Now,  it  is  hardly  necessary  as  preliminary  to  a  discussion  of  the 
laws  to  say  anything  about  the  importance  of  the  negotiable  instru- 
ment— the  bill,  the  note,  and  the  check — as  an  instrument  of  com- 
merce, and  of  the  part  the  banker  plays  to  make  that  instrument 
effective.  Every  individual  transaction  of  the  vast  multitude  of 
daily  dealings,  whereby  goods  are  sold  or  services  performed,  re- 
quires the  payment  of  money  or  some  equivalent ;  and  as  modern 
trade  transactions  are  conducted  largely  on  credit,  the  negotiable 
instrument,  as  a  substitute  for  money,  is  the  medium  for  payment 
mosl  largely  employed.     If  there  were  no  such  thing  as  a  negotiable 


122    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

instrument,  representing  the  element  of  time  in  the  making  of  a 
payment,  and  if  actual  money  were  the  only  medium  available,  the 
great  bulk  of  trade  transactions  on  credit,  which  make  up  our 
modern  commerce,  could  not  be  carried  on,  and  even  with  the 
negotiable  instrument,  if  there  were  no  such  thing  as  a  bank,  to 
stand  ready  with  its  cash  as  a  commercial  purchaser  of  the  instru- 
ment, the  same  thing  would  be  true.  In  this  view,  we  see  the 
negotiable  instrument  and  the  bank  as  twin  necessities,  constituting 
the  two  foundational  props  upon  which  the  modern  business  of  the 
interchange  of  property  is  conducted. 

Then,  again,  in  all  those  large  varieties  of  transactions  involving 
the  making  of  payments  where  the  element  of  time,  or  credit,  does 
not  enter,  but  the  question  is  one  of  using  the  most  convenient  or 
economical  medium,  we  find  the  negotiable  instrument  largely  em- 
ployed in  preference  to  actual  cash  as  best  suited  to  the  necessities 
of  the  case.  If  money  is  to  be  paid  to  a  creditor  at  a  distance,  the 
shipment  of  actual  money  is  too  cumbersome  and  risky ;  so  this  is 
done  by  means  of  a  banker's  draft,  or  other  instrument  of  like 
nature.  And  without  multiplying  instances,  every  depositor  in  a 
bank  pays  his  debts  by  issuing  his  check  on  the  institution,  pre- 
ferably to  cash,  as  a  more  convenient  and  economical  method  of 
settling  his  obligation.  The  check  is  the  most  powerful  instrument 
in  the  country  for  economizing  the  currency,  both  metallic  and 
paper. 

I  have  made  this  brief  reference  to  the  importance  of  bills  and 
notes  and  checks,  and  of  the  conduct  of  modern  deposit  and  dis- 
count banking  with  these  instruments,  to  fix  in  your  mind  the 
necessity  that  exists  for  a  good,  well  regulated,  uniform,  just,  and 
equitable  body  of  laws  governing  these  important  matters ;  and  this 
brings  me  to  my  main  theme — what  are  the  laws  governing  these 
subjects  and  how  did  they  come  to  be  established? 

The  formation  of  our  law  governing  bills,  notes,  and  checks 
and  the  dealings  of  bankers  is  the  result  of  a  peculiar  process.  The 
law  consists  of  a  body  of  rules  which  have  been  built  up  piecemeal 
by  judicial  decisions  founded  on  custom.  It  has  been  developed  out 
of  the  disputes  of  men.  This  process  originated  in  England,  from 
which  we  derive  the  original  of  our  laws,  and  has  continued  in  the 
various  states  of  this  country  since  the  American  Revolution.     At 


GENERAL  BANKING  SECTION  123 

occasional  times  in  the  process  of  judicial  rule-building  there  have 
been  statutory  enactments  providing  rules  on  this  or  that  particular 
point  of  commercial  law. 

The  foundation  or  starting  point  of  this  process  was  the  estab- 
lished custom  of  English  merchants  with  reference  to  bills  of  ex- 
change. Six  hundred  years  ago  England  began  to  be  a  trading 
country,  and  English  merchants  would  ship  goods  to  various  cities 
on  the  continent  of  Europe  and  would  receive  shipments  of  goods 
in  return.  To  save  the  sending  of  actual  money  back  and  forth  in 
settlement  of  these  trade  debts,  the  use  of  bills  of  exchange  came 
into  vogue,  and  these  were  first  confined  to  foreign  bills  between 
English  merchants  and  foreign  traders.  The  bill  of  exchange  was, 
at  first,  not  a  negotiable  instrument  in  the  sense  in  which  the  term  is 
now  understood,  but  was  merely  an  instrument  by  which  a  trade 
debt  due  in  one  place  was  transferred  to  another.  Later,  these 
foreign  bills  of  exchange  came  to  be  negotiable  and  to  be  transferred 
by  endorsement  and  delivery.  At  a  point  of  time  prior  to  any  de- 
cided case  announcing  a  positive  rule  of  law,  there  had  grown  up 
and  been  developed  a  settled  custom  of  merchants  with  regard  to 
the  negotiation,  the  presentment  for  acceptance  and  payment,  the 
protest  upon  dishonor,  and  the  rights  of  holders  of  these  foreign 
bills  of  exchange.  The  first  decided  case  upon  a  bill  of  exchange 
arr.se  in  1603,  about  300  years  ago. 

Gradually,  with  the  growth  of  trade  and  general  business,  new 
customs  sprang  into  existence  and  general  recognition.  About  250 
years  ago,  inland  or  domestic  bills  of  exchange  between  traders  in 
different  cities  in  England  came  into  vogue,  and  afterwards  their 
use  was  extended  to  all  persons,  whether  traders  or  not.  Promis- 
sory notes  came  into  use  at  about  the  same  time  as  inland  bills  of 
exchange.  About  this  period,  also,  the  merchants  of  London  began 
depositing  their  cash  with  goldsmiths,  and  for  these  deposits  they 
Would  receive  goldsmiths'  notes,  or  "banker's  cash  notes,"  as  they 
metimes  called,  and  the  goldsmiths  would  lend  out  a  portion 
of  these  '!  at  inten    t.     Later,   the   goldsmiths'   notes   were 

supplanted  by  the  bank  check,  payable  to  bearer,  which  became  the 
means  of  paying  the  deposits  on   the  order  of  the  depositor; 
still  later,  these  checks  were  drawn  payable  to  the  order  of  named 
payees. 


124  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

The  customs  which  thus  grew  up  and  were  generally  recognized 
with  regard  to  bills,  notes,  and  checks,  and  the  business  of  banking, 
have  formed  the  ground- work  of  the  system  of  judicial  rules  which  jj 
have  been  built  up  by  the  courts  regulating  the  subject.  From 
time  to  time  disputes  would  arise  between  merchants  concerning 
some  particular  instrument ;  the  courts  would  be  appealed  to ;  they 
would  take  proof  of  merchants  as  to  what  the  custom  was;  and 
decisions  would  be  rendered  recognizing  the  general  customs  shown 
to  exist  and  announcing  rules  of  law  in  accordance  therewith,  not 
only  for  the  government  of  that  particular  case,  but  for  the  govern- 
ment of  all  cases  of  like  nature.  From  the  first  decided  case,  in 
the  year  1603,  cases  came  up  in  the  courts  with  increasing  frequency, 
but  the  courts  would  not  always  decide  the  same  way.  In  the  year 
1702,  for  example,  a  celebrated  dispute  arose  over  the  negotiability 
of  a  promissory  note.  At  that  time  inland  bills  of  exchange,  as 
well  as  foreign,  were  indisputably  negotiable,  and  the  courts,  in 
several  previous  cases  involving  promissory  notes,  held  notes  nego- 
tiable in  like  manner ;  but  in  that  year  a  case  came  before  Sir  John 
Holt.  Chief  Justice  of  the  Court  of  King's  Bench,  who  held  that  a 
promissory  note,  payable  to  one  J.  S.  or  order,  was  not  a  negotiable 
instrument  within  the  custom  of  merchants,  and  that  the  contrary 
idea  proceeded  from  the  obstinacy  and  opinionativeness  of  Lombard 
street,  which  attempted  in  these  matters  to  give  laws  to  West 
minister  Hall.  But  Lord  Holt's  decision  was  so  contrary  to  the 
general  understanding,  as  well  as  to  commercial  necessity,  that  in 
the  following  year  the  English  Parliament  changed  the  rule  he  had 
established  by  enacting  that  promissory  notes,  payable  to  any  per- 
son or  order,  should  be  assignable  or  endorsable  over  in  the  same 
manner  as  inland  bills  of  exchange,  according  to  the  custom  of 
merchants. 

Gradually,  as  the  law  came  to  be  established  in  a  body  of  judicial 
decisions  which  crystallized  into  set  rules  the  various  customs  shown 
to  exist,  there  came  to  be  less  and  less  resort  to  custom,  for  the 
decision  of  new  cases  which  arose,  and  more  and  more  resort  to 
the  precedent  of  earlier  decided  cases. 

Now,  this  very  inadequately  describes  the  process  by  which  the 
English  law  has  been  built  up — a  process  which  has  been  continued 
in  this  country  since  the  American  Revolution.     When  the  original 


GENERAL  BANKING  SECTION  125 

thirteen  states  became  independent,  and  as  new  states  have  from 
time  to  time  been  admitted  into  the  Union,  the  legislatures,  in  a 
majority  of  cases,  have  enacted  a  few  statutory  rules  governing 
bills  and  notes,  regulating  the  matter  of  acceptances,  the  negotia- 
bility of  notes,  and  some  other  matters,  and  have  left  to  the  courts 
the  formation  of  the  great  body  of  rules  governing  our  subject 
under  a  process  which  has  taken  the  English  body  of  decisions  for  a 
basis,  and  has  added  new  rules  as  new  questions  have  arisen  for 
determination. 

Now,  what  is  the  condition  of  the  law  governing  bills,  notes,  and 
banking  as  we  find  it  in  this  country  to-day,  as  a  result  of  this 
process  of  judicial  rule-building,  with  statutory  accompaniment? 
We  find  that  the  process  has  gone  on  independently  in  each  of  the 
fifty-two  states  and  territories — that  each  state  and  territory  has 
its  own  independent  body  of  law,  statutory  and  judicial,  and  that 
on  many  vital  points,  with  regard  to  negotiable  paper  and  the  bank- 
ing business,  the  rules  adopted  in  the  different  states,  both  by  the 
legislatures  and  the  courts,  are  diametrically  opposed.  Were  all 
transactions  in  bills  and  notes,  and  all  banking  dealings,  confined 
between  parties  in  the  same  state  or  territory,  it  would  not  matter 
so  much  whether  the  theories  and  rules  adopted  in  any  particular 
state  were,  or  were  not,  the  best  or  nearest  correct.  Dealers  in  each 
state  would  come  to  know  the  law  and  to  adapt  their  transactions 
with  reference  thereto.  But  in  this  great  country  trade  and  com- 
merce know  no  state  lines.  The  vast  interchange  of  property  be- 
tween buyer  and  seller,  and  the  banking  transactions  in  connection 
therewith,  are  carried  on  between  Texas  and  Xew  York,  between 
Iowa  and  Kansas,  and  between  California  and  Missouri,  with  the 
same  freedom  as  are  transactions  between  Kansas  City  and  St. 
Louis  in  the  same  state  of  Missouri.  The  banker  in  each  state 
has  correspondents  in  and  negotiates  transactions  with  bankers  and 
merchants  in  many  other  states.  The  promissory  note,  made  in 
and  governed  by  the  laws  of  Alabama,  is  often  purchased  by  the 
banker  in  Chicago  or  New  York;  and  the  banker  in  Kansas  City 
or  St.  Louis  holds  among  his  assets,  notes  and  other   negotiable 

truments  which  have  come  from,  and  arc  governed  by,  the  laws 
of  sister  states.  And  so  while  the  country  is  one  commercially, 
and  while  the  negotiable  instrument  is  largely  a  national  circulating 


126    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

medium,  rather  than  confined  within  the  borders  of  any  particular 
state,  there  is  not  one,  but  many  systems  of  laws  by  which  it  is 
governed. 

Let  us  take  the  promissory  note  as  an  illustration.  Under  the 
rule  of  the  law  merchant — the  rule  evolved  from  the  process  of 
judicial  rule-building-  which  I  have  described — a  note  is  negotiable, 
although  it  does  not  specify  any  particular  place  of  payment ;  just 
the  ordinary  form  of  promissory  note — three  months  after  date  I 
promise  to  pay  John  Smith  or  order  $500.  But  in  some  of  the  states 
the  legislatures  have  adopted  the  theory  that,  to  be  a  negotiable  in- 
strument, a  promissory  note  must  be  made  payable  at  a  bank.  In 
Indiana,  for  example,  the  legislature  has  provided  that  a  note,  to 
be  negotiable,  must  be  payable  to  order  of  bearer  in  a  bank  of  that 
state.  In  Kentucky,  by  the  peculiar  statute  of  that  state,  a  note  to 
be  negotiable  must  be  payable  to  a  person  or  corporation,  must  be 
payable  and  negotiable  at  some  incorporated  bank  in  the  state,  and 
must  be  endorsed  to  and  discounted  by  the  bank  at  which  payable, 
or  by  any  other  bank  in  the  state.  In  Alabama  not  all  promissory 
notes  are  negotiable,  but  only  those  which  are  payable  "at  a  bank 
or  private  banking  house  or  a  certain  place  of  payment  therein 
designated."  And  in  your  own  state  of  Missouri,  while  there  is  no 
requirement  that  a  promissory  note  must  be  made  payable  at  a  bank, 
the  legislature  has  provided  that,  to  be  negotiable,  it  must  contain 
the  words  "value  received,"  words  which  are  not  required  by  the 
rule  of  the  law  merchant. 

These  are  illustrations  of  statutory  conflict;  they  show  that, 
instead  of  one  standard  of  negotiability  of  a  promissory  note 
throughout  the  country,  there  are  several  different  standards,  and 
the  result  of  these  independent  systems  of  statutory  law  is  especially 
disastrous  to  all  engaged  in  interstate  commerce,  for  no  man,  tak- 
ing a  negotiable  instrument  governed  by  the  laws  of  this  or  that 
particular  state,  can  reasonably  be  familiar  with  all  the  divergent 
rules  affecting  its  value  in  his  hands. 

But  the  conflict  of  law  governing  negotiable  instruments  is  not 
confined  to  the  state  legislatures  alone.  Far  from  it.  There  is  a 
judicial  conflict  as  well.  While  there  are  many,  and  probably  a 
large  majority  of  fundamental  propositions  upon  which  all  the 
courts  of  the  country  agree,  yet  there  is  a  very  considerable  number 


GENERAL  BANKING  SECTION  127 

of  essential  points  in  the  law  of  commercial  paper  and  of  banking, 
whereon  the  views  of  judges  in  different  states  and  the  rules  de- 
clared as  a  result  of  those  views  are  not  at  all  in  accord.  In  fact, 
the  conflict  is  so  extensive  and  far  reaching  in  its  detail  that  any 
true  picture  of  existing  banking  and  commercial  law  must  be  one 
wherein  diversity,  rather  than  symmetry,  is  apparently  the  most 
prominent   characteristic. 

As  the  mind  ranges  over  the  vast  field  of  conflicting  rules  it 
becomes  staggered  and  confused  with  the  infinity  of  individual  in- 
stances, which  stand  out  in  the  reported  cases  as  silent  testimony 
of  the  unsuitableness  of  so  many  independent  systems  of  state 
laws  to  regulate  properly  the  important  commercial  transactions  of 
the  country.  Standing  face  to  face  with  so  much  conflict,  it  is  a 
difficult  matter,  in  the  short  space  of  time  at  command,  to  determine 
which,  out  of  the  almost  numberless  instances,  are  the  best  to  select 
by  way  of  illustration.  But  at  the  risk  of  wearying  you  with  a 
doleful  recital,  I  will  make  bold  to  present  a  few  examples. 

It  has  been  a  common  practice  in  many  western  states,  in  the 
framing  of  promissory  notes,  to  add  a  clause  promising  to  pay 
reasonable  attorney's  fees  in  the  event  the  instrument  is  not  paid  at 
maturity.  Now,  in  some  of  the  states  the  courts  have  held  that  a 
clause  of  this  nature  does  not  affect  the  negotiability  of  the  in- 
strument. One  of  the  fundamental  requisites  of  negotiability  is 
that  the  amount  payable  must  be  certain,  and  these  courts  have  held 
that  such  a  clause  does  not  make  the  amount  due  at  maturity  of  the 
note  uncertain,  and  that,  therefore,  the  instrument  is  negotiable. 
In  other  states  the  courts  have  held  that  the  clause  does  make  the 
amount  payable  uncertain  and  that  the  instrument  is  not  negoti- 
able. I  shall  not  attempt  an  enumeration  of  the  states  in  which 
this  point  has  been  ruled  one  way  or  the  other,  but  it  may  be  of 
interest  to  state  briefly  what  has  been  held  in  Kansas  and  in  Missouri 
on  this  point. 

In  Kansas  the  courts  have  held  such  notes  negotiable.  But  in 
the  year  1876  I  find  the  Kansas  Legislature  passed  a  law  making 
it  unlawful  thereafter  to  contract  for  payment  of  attorney's  fees  in 
any  note  or  bill,  and  provided  that  such  a  contract  should  be  void. 
But  since  that  law  the  Supreme  Court  of  Kansas  has  held  that 
while  it  renders  nugatory  and  unenforceable  a  stipulation  to  pay 


128  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

attorney's  fees,  the  law  does  not  vitiate  the  contract  for  the  pay- 
ment of  money  ;  that  such  a  provision  is  to  be  regarded  as  mere 
surplusage  and  the  negotiability  of  the  note  is  not  affected  there- 
by. Probably  since  the  law  of  1876  attorney  fee  notes  in  Kansas 
are  not  so  frequently  used  as  formerly,  yet  they  are  occasionally 
to  be  met  with  and  they  are  negotiable  in  that  state. 

Now,  here  in  Missouri,  the  courts  have  held  just  the  contrary, 
and  it  has  become  settled  by  numerous  Missouri  decisions  that  the 
insertion  of  such  a  clause  in  a  note  makes  the  amount  payable  un- 
certain and  renders  it  non-negotiable.  Hence  if  a  Kansas  stock 
dealer  should  come  into  Missouri  and  sell  his  stock  and  take  in 
payment  a  note  providing  for  payment  of  attorney's  fees,  delivered 
to  him  here  in  Missouri,  and  should  then  take  this  note  back  and 
discount  it  with  a  Kansas  bank,  the  note,  being  governed  by  the  law 
of  Missouri,  would  be  non-negotiable  and  the  Kansas  bank  would 
hold  it  subject  to  any  equities  between  maker  and  payee.  The  same 
thing  would  be  true  of  a  note  which  did  not  provide  for  the  pay- 
ment of  attorney's  fees,  but  which  failed  to  contain  the  words 
"value  received,"  as  these  words,  I  have  shown,  are  necessary  to  the 
negotiability  of  Missouri  notes. 

While  this  condition  of  non-uniformity  of  state  laws  upon  the 
negotiability  of  notes  exists,  how  important  is  it  that  the  banker  in 
one  state  should  know  the  laws  of  all  those  other  states  whose  paper 
he  acquired. 

Another  example:  Among  the  variety  of  instruments  which 
originate  in  modern  commercial  transactions  are  promissory  notes 
and  bills  of  exchange  containing  a  clause  after  the  promise  or  di- 
rection to  pay:  ''With  current  exchange  on  New  York,"  or  "with 
current  exchange  on  Chicago."  Notes  and  bills  so  payable  circu- 
late between  traders  in  different  states  and  often  find  entry  through 
the  discount  windows  of  commercial  banks.  The  consensus  of 
opinion  among  bankers  and  merchants  is  that  such  paper  is  negoti- 
able; but  here  again  the  courts  in  different  states  are  ranged  on 
both  sides  of  the  fence.  In  a  case  which  came  before  the  Missouri 
Court  of  Appeals,  a  few  years  ago,  a  bill  of  exchange  had  been 
drawn  at  St.  Louis  "with  exchange  on  New  York."  It  was  de- 
cided that  the  instrument  was  not  negotiable  because  the  rate  of 
exchange  constantly  fluctuates,  and  it  therefore  lacked  certainty  as 


GENERAL  BANKING  SECTION  129 

to  amount.  The  court  said  that  if  a  change  of  rule  was  required 
in  the  interests  of  commerce,  it  should  be  made  by  the  legislature 
and  not  by  the  courts.  On  the  other  hand,  in  a  case  quite  recently 
decided  by  the  Supreme  Court  of  Minnesota,  where  promissory 
notes  had  been  drawn  payable  at  St.  Paul,  "with  current  exchange 
on  New  York  City,"  the  court  held  that  the  provision  for  exchange 
did  not  make  the  amount  uncertain,  as  it  could  be  readily  ascer- 
tained. In  this  case  the  court  said  that  it  was  the  general  under- 
standing of  bankers  and  business  men  that  such  paper  was 
negotiable,  and  that  the  policy  of  the  courts  should  be  to  make 
their  decisions  conform,  as  far  as  possible,  to  the  general  customs 
of  business.  The  conflict  of  view  on  this  point  has  extended  into 
several  states  and  the  courts  are  about  equally  divided  in  opinion. 

Another  instance  of  conflict  is  where  a  bill  of  exchange  or 
promissory  note  is  made  payable  in  current  funds,  and  the  question 
has  arisen  whether  current  funds  are  the  equivalent  of  money  so 
as  to  answer  the  requirement  that  a  note  to  be  negotiable  must  be 
payable  in  money.  Decisions  have  been  rendered  in  five  or  six 
states  that  "current  funds"  are  not  the  equivalent  of  money,  and 
that  instruments  containing  such  provisions  are  not  negotiable. 
Four  or  five  other  states,  as  well  as  the  Supreme  Court  of  the 
United  States,  have  held,  to  the  contrary,  that  current  funds  are 
money  and  that  such  instruments  are  negotiable.  This,  then,  is 
another  instance  where  a  banker  in  a  state  where  such  instruments 
are  regarded  as  negotiable,  who  may  purchase  a  note  or  bill  gov- 
erned by  the  law  of  a  state  which  declares  them  non-negotiable, 
may  be  misled  by  the  law  of  his  own  state  and  fall  into  a  trap.  I 
have  not  by  any  means  exhausted  the  subject  of  special  clauses  in 
notes  which  have  been  interpreted  as  destroying,  or  as  not  affecting, 
the  negotiability  of  the  instrument;  but  I  will  not  go  deeper  into 
this  particular. 

Another  point  of  conflict  which  has  been  most  far-reaching  is 
upon  the  matter  of  credit  enforcements.  It  is  a  very  frequent 
transaction  for  a  man  to  go  to  a  bank  and  ask  a  loan  of  money 
on  his  note,  which  the  bank  is  willing  to  make,  provided  he  will  get 
some  responsible  third  party  to  endorse  the  note,  so  as  to  make 
it  double-name  paper.  Often  such  notes  will  be  drawn  by  the 
borrower,  made  payable  to  the  bank,  and  the  party  signing  to  give 
9 


■  >' 


PRACTICAL  TROBLEMS  IN  BANKING  AND  CURRENCY 


the  maker  credit  will  endorse  his  name  upon  the  back  before  de- 
livery to  the  payee.  Now,  there  has  been  a  very  wide  conflict  of 
decision  among-  the  courts  of  the  country  as  to  the  character  of 
liability  assumed  by  such  third  party.  In  some  states  he  has  been 
held  a  joint  maker,  in  others  a  surety,  in  others  an  endorser,  in 
others  a  guarantor;  each  of  these  contracts  being  of  a  different 
character  and  imposing  different  duties  upon  the  holder  of  the  note. 
I  cannot  attempt  any  enumeration  of  the  rules  in  different  states 
on  this  subject — nearly  every  state  in  the  Union  has  decided  it  one 
way  or  another — but  I  will  simply  state  the  rules  which  have  been 
adopted  in  the  courts  of  Kansas  and  in  Missouri.  In  Kansas,  when 
a  man  writes  his  name  on  the  back  of  a  note  before  delivery  to  the 
payee,  he  is  prima  facie  a  guarantor;  but  parole  proof  may  be  in- 
troduced to  show  a  different  understanding  or  agreement  as  to  the 
character  of  liability.  In  Missouri,  such  a  man  is  presumed  to  be 
a  joint  maker,  but  the  actual  contract  can  be  shown  by  outside 
evidence.  There  is  one  case  reported  in  Missouri  where  outside 
evidence  was  admitted  to  show  that  the  third  party,  in  reality,  con- 
tracted as  endorser,  and  in  this  case  he  was  discharged  from  liability, 
as  the  holder  of  the  note  had  not  complied  with  the  law  with  regard 
to  due  demand  and  notice  of  dishonor. 

I  come  now  to  one  other  important  matter  upon  which  there 
has  been  wide  conflict  among  the  courts  all  over  the  country — the 
matter  of  sufficiency  of  consideration  to  constitute  one  who  ac- 
quires a  note  a  bona  fide  purchaser  for  value,  so  as  to  enforce  it 
free  from  equities.  A  gives  his  note  to  order  of  B,  being  induced 
to  do  so  through  fraud  of  B.  B  owes  his  banker  a  sum  of  money 
and  the  bank  is  pressing  B  for  payment.  B  says,  "I  cannot  pay  you 
the  money,  but  I  hold  A's  note  to  my  order,  not  yet  due,  and  I 
will  endorse  this  note  over  to  you  as  security."  This  is  done. 
Now,  the  important  question  arises.  The  bank  not  having  given 
actual  money  for  the  note,  but  having  only  received  it  for  an  ante^- 
cedent  debt,  is  it  to  be  regarded  as  a  purchaser  for  value  so  as  to 
enforce  the  note  against  the  maker,  free  from  his  defense  of  fraud? 
In  nearly  every  state  in  the  Union  this  question  has  been  passed 
upon  by  the  courts,  and  the  two  opposing  theories  have  been  adopted 
— one  that  a  pre-existing  debt  constitutes  the  bank  a  holder  for 
value,  the  other  that  it  does  not. 


GENERAL  BANKING  SECTION  131 

In  Missouri,  where  a  negotiable  note  is  transferred  to  a  bank 
merely  as  collateral  security  for  a  pre-existing  debt,  no  new  con- 
sideration being  given  for  it,  the  bank  takes  it  subject  to  all  the 
equities  existing  between  the  original  parties.  But  a  Missouri  bank 
which  accepts  a  negotiable  note  before  maturity  in  payment  of,  as 
distinguished  from  security  for,  a  pre-existing  debt,  is  regarded  as 
an  innocent  purchaser  for  value ;  and  this  bank  is  also  given  the 
same  rights  as  an  innocent  purchaser  even  where  it  takes  it  as 
security  if  at  the  time  it  makes  an  express  agreement  to  forbear 
suit  on  the  debt  until  the  collateral  shall  mature. 

What  is  the  law  in  Kansas?  In  Kansas  it  has  been  held  that 
he  who  received  the  note  of  a  third  party  in  payment  of  a  pre- 
existing debt  parts  with  value  and  is  entitled  to  the  protection  of  a 
purchaser  for  value.  This  is  the  same  as  Missouri,  but  I  do  not 
find  that  the  question  of  the  rights  of  one  who  takes  such  a  note 
from  the  payee  as  security,  and  not  in  payment  of  a  pre-existing 
debt,  has  been  decided  by  the  courts  of  that  state. 

I  will  not  go  any  further  into  the  matter  of  conflict  of  state 
laws  governing  bills  and  notes.  Enough  has  been  said  to  illustrate 
the  proposition  that  wide  conflict  exists  and  that  the  present  con- 
dition of  law,  made  up  so  largely  of  independent  and  antagonistic 
state  rules,  is  far  from  satisfactory,  hampers  commercial  transac- 
tions, and  causes  great  losses  to  the  mercantile  and  banking  com- 
munity. Not  only  does  this  conflict  with  reference  to  bills  and 
notes,  but  it  is  apparent  all  along  the  line  of  banking  law.  It 
extends  to  checks  on  banks,  to  certificates  of  deposit,  to  bills  of 
lading,  to  warehouse  receipts  and  other  classes  of  documentary 
security  taken  by  banks  as  security  for  advances;  and  it  runs  into 
the  operations  of  banks  as  agents  for  the  collection  of  commercial 
paper,  checks,  certificates  of  deposit,  bills  of  lading,  and  the  liability 
of  collecting  banks. 

But  I  must  not  leave  the  subject  of  the  present  condition  of  the 
law  governing  bai  '  nd  bills  and  notes  with  an  expression  of 

the  idea  that  it  is  all  as  bad  as  it  can  possibly  be  and  there  is  no 
good  in  it.  T  have  been  simply  pointing  out  the  condition  of  con- 
flirt.  To  the  contrary,  great  as  its  bulk  has  grown  to  be,  and 
attered  as  it  is  in  some  twenty  thousand  decided  cases,  reported 
in  hundreds  of  volumes  of  reports,  the  subject  governed  is  most 


132    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

intricate  and  complex,  and  the  law  works  ont  the  rule  of  right  and 
substantial  justice  in  the  large  majority  of  individual  instances. 
The  rules  of  law  have  been  built  up  in  the  exercise  of  judicial 
reasoning,  applied  to  particular  transactions  with  painstaking  and 
conscientious  effort.  They  are  the  product  of  the  accumulated 
wisdom  and  experience  of  ages,  and  no  one  man  or  set  of  men, 
in  any  one  generation,  could  produce  anything  so  beneficial  and 
effective.  While  error  and  bad  judgment,  and,  in  some  instances, 
a  too  slavish  following  of  precedent,  contrary  to  sound  reason,  are 
evidenced,  this  is  only  in  individual  cases,  and  is  not  characteristic 
of  the  whole  body  of  the  law.  The  numerous  instances  of  conflict 
are  a  blemish,  rather  than  a  vital  defect.  Further,  in  aid  of  its 
accessibility,  learned  men  have  arranged  its  rules  in  scientific  order, 
sub-divided  the  various  propositions  in  chapters  and  sections,  and 
have  published  the  results  of  their  labors  in  text-books  on  banking 
and  on  bills  and  notes,  in  which  the  decided  cases  are  cited  in  foot- 
notes as  authority  for  the  rules  announced.  These  books,  while 
unofficial,  are  of  the  greatest  use,  not  only  to  the  lawyer,  but  to 
the  banker  and  the  merchant,  in  showing  him  what  the  law  is  upon 
any  particular  point. 

The  great  difficulty  is  to  be  found  in  our  political  conditions. 
Commercially,  the  nation  is  one,  but  we  have  not  one,  but  fifty  in- 
dependent fountain  heads  of  law,  governing  commercial  trans- 
actions ;  and  a  conflict  of  rule  is  inevitable  so  long  as  men  are 
constituted  to  think  differently  upon  the  same  state  of  facts.  It  is 
in  these  matters  of  conflict  of  law,  statutory  and  judicial,  governing 
commercial  transactions,  that  there  is  need  for  improvement. 

And  the  improvement  is  on  the  way.  All  of  you,  doubtless,  are 
familiar  with  the  negotiable  instruments  law,  which  has  been  so 
successfully  advocated  by  the  American  Banking  Association,  and 
which  has  up  to  date  been  enacted  in  seventeen  states  and  terri- 
tories, besides  the  District  of  Columbia — more  than  one-third  of 
the  whole.  This  law  covers  bills,  notes,  checks,  and  all  negotiable 
instruments,  and  it  affords  the  needed  improvement  in  the  laws 
governing  these  subjects.  While  the  negotiable  instruments  law  is 
the  independent  statutory  enactment  of  each  state  where  enacted, 
still,  its  rules  being  the  same  in  all,  it  provides  the  needed  uni- 
formity.    Instead  of  many  standards  of  negotiability  of  a  bill  or 


GENERAL  BANKING  SECTION  133 

note,  there  is  one  uniform  standard,  and  the  banker  purchasing 
paper  coming  from  any  state  where  that  law  prevails  can  know 
what  he  is  acquiring.  It  provides  not  only  a  uniform  standard  of 
negotiability,  but  also  one  rule  governing  the  matter  of  considera- 
tion, the  liabilities  of  endorsers,  the  rights  of  holders,  and  with 
regard  to  presentment  for  payment  and  proceedings  upon  dishonor. 
For  this  law,  commercial  America  should  be  truly  thankful,  and 
when  it  comes  to  be  enacted  in  all  the  states,  as  it  would  seem 
reasonably  destined  to  be,  the  improvement  wrought  by  way  of 
simplicity  and  uniformity  will  be  vast,  indeed.  Of  course,  the  ne- 
gotiable instruments  law  does  not  cover  all  the  matters  of  conflict 
in  which  improvement  is  desired.  It  does  not  regulate  certificates 
of  stock,  bills  of  lading,  and  securities  of  like  nature  which  are 
dealt  in  by  bankers ;  it  applies  to  negotiable  instruments  payable  in 
money  only.  The  unification  of  the  laws  upon  these  matters  must 
be  hoped  for  in  the  course  of  time,  when  all  the  state  legislatures 
act  in  uniform  accord,  and  when  all  the  judges  come  to  think  alik?. 
And  now  this  completes  my  brief  and  necessarily  imperfect 
description  of  the  evolution  of  banking  law.  The  subject  may  be 
likened  to  a  tree,  three  hundred  years  old,  with  roots  planted  in 
England,  whose  fifty  branches  have  grown  throughout  the  states 
of  this  great  American  commonwealth.  A  tree  which  has  brought 
forth  both  good  and  evil  fruit — a  tree  whose  twigs  have  expanded 
and  multiplied  in  a  variety  of  ways,  and  in  many  instances  have  been 
twisted  and  tangled  and  have  crossed  one  another,  impeding,  to 
some  extent,  the  symmetrical  growth  of  the  whole.  A  tree  which 
requires  constant  care  and  nourishment  by  intelligent  gardeners, 
drawing  their  knowledge  from  the  same  fountain  of  judicial  wis- 
dom ;  a  tree  which  calls  for  occasional  pruning  of  its  dead  material 
by  the  legislative  pruning  knife ;  but  a  tree  which,  with  the  onward 
march  of  ages,  with  increasing  education  and  enlightenment,  with 
the  nearer  and  nearer  approach  of  man  to  God,  is  destined  to  grow 
and  expand  to  a  perfect  tree  of  justice  and  of  right. 


134    PRACTICAL  PROBLEMS  IX  BANKING  AND  CURRENCY 
FINANCIAL  ADVERTISING 

ADDRESS  DELIVERED  BY  WILLIAM  S.  POWER,  PRESIDENT  OF  THE  WILLIAM  S.  POWER 
COMPANY,  PITTSBURG,  PA.,  BEFORE  THE  PENNSYLVANIA  BANKERS'  ASSOCIA- 
TION, AT   ATLANTIC  CITY,  OCTOBER,    KJO4. 

It  would  be  a  useless  waste  of  time  for  me  to  attempt  to  argue 
the  value  of  advertising  in  general.  It  is  a  fact  too  well  estab- 
lished to  admit  of  argument.  Publicity  is  the  basis  of  all  business 
success — the  corner-stone  without  which  all  other  things  are  useless. 
And  publicity  is  advertising. 

It  may  take  any  one  of  a  dozen  different  forms.  It  may  con- 
sist merely  of  a  sign  above  the  door,  or  of  a  name  in  the  window ; 
but  it  has  got  to  be  there  in  some  shape  or  form,  or  there  can  be 
no  business  success.  It  is  an  easily  understood  axiom  that  there 
must  be  knowledge  of  a  business  on  the  part  of  the  public,  or  there 
can  be  no  business.  Hence  the  question  resolves  itself  into  one  of 
method  rather  than  of  expediency. 

How  can  we  advertise  a  financial  institution  so  as  to  achieve 
the  largest  results  041  the  smallest  expenditure  of  money?  The 
essential  question  is  not,  How  much  do  you  spend  for  advertising? 
but,  How  much  do  you  get  out  of  it?  You  buy  investment  bonds, 
not  because  they  are  beautifully  engraved,  on  heavy  paper,  with  a 
picture  of  George  Washington  or  the  American  eagle  in  the  center, 
but  because  they  pay  a  good  rate  of  interest  and  have  a  substantial 
value  back  of  them ;  and  you  must  use  just  the  same  hard  common- 
sense  in  the  expenditure  of  your  advertising  appropriation.  I  have 
known  bankers  who  were  as  proud  as  a  peacock  of  their  advertis- 
ing, because  it  displayed  their  names  and  their  large  resources  in 
prominent  type,  and  who  seemed  utterly  unmindful  that  they  got 
no  tangible  results  from  it. 

Now  as  to  methods.  There  are  a  dozen  or  more  different  lines 
upon  which  an  advertising  campaign  may  be  based.  All  are  good  in 
their  way,  and  it  is  not  so  much  a  question  as  to  which  method 
you  select  as  it  is  of  the  persistence  and  intelligence  with  which 
you  carry  it  out.  When  a  man  comes  to  you  and  tells  you  that, 
if  you  want  to  advertise  successfully,  you  must  do  it  by  one  par- 
ticular method  which  he  has  evolved,  put  him  down  in  your  mental 
notebook  either  as  an  ass  or  as  an  insufferable  egotist.  There  is 
any  one  sure  way. 


GENERAL  BANKING  SECTION 


135 


Now,  broadly  speaking,  we  think  of  advertising  as  divided  into 
two  classes — general  advertising  and  direct  advertising.  The  first 
class  reaches  the  masses'  through  the  medium  of  the  newspaper  and 
other  publications,  while  the  second  class  reaches  the  individual 
through  the  medium  of  personal  letters,  folders,  booklets,  and  so 
forth,  sent  directly  through  the  mails. 

Under  ordinary  conditions,  newspaper  advertising  must  take 
first  rank.  The  newspaper  is  the  universal  messenger  to  the  hearts 
and  homes  of  the  people,  and  intelligently  used  newspaper  adver- 
tising is  just  as  certain  to  bring  results  as  good  stocks  are  to  pay 
dividends.  Xote  the  fact  that  I  said  "intelligently  used."  Enough 
money  is  wasted  every  year  in  unintelligent  advertising  to  make 
everyone  in  this  hall  moderately  wealthy.  But  the  same  is  true  of 
banking  as  a  business,  or  of  farming,  or  of  anything  else  in  which 
men  engage.  The  trouble  is  not  with  these  things  in  themselves, 
but  with  the  way  in  which  they  are  attempted.  Advertising  itself 
is  not  a  failure,  but  a  great  many  people  make  a  failure  of  it. 

I  know  one  bank,  for  instance,  that  publishes  a  big,  glaring 
advertisement  every  time  it  issues  a  statement,  and  drops  completely 
out  of  sight  between  times.  It  is  wasting  its  money.  Another 
bank  pays  for  three  inches  space  every  day  and  crowds  it  full  of 
officers'  and  directors'  names,  never  changing  it  unless  a  death  or 
resignation  makes  a  change  necessary.  It  is  also  wasting  a  good 
deal  of  money  that  might  be  put  to  work  in  a  better  cause.  One 
bank  in  western  Pennsylvania  was  advertising  a  savings  account 
pass-book  as  a  desirable  Christmas  gift  in  the  middle  of  July,  and 
still  another  one  is  at  this  minute  advertising  the  joy  of  having  a 
savings  account  on  which  to  draw  now  that  the  time  has  come 
f'-r  a  summer  vacation.  Glaring  examples  of  how  not  to  do  it; 
and  yet  the  bankers  who  are  paying  for  all  this  misdirected  publicity 
are  shrewd,  conservative  men  who  have  made  signal  successes  in 
life  along  other  lines.  The  trouble  with  them  is  that  they  look 
upon  advertising  as  an  expense  that  must  be  tolerated  rather  than  as 
an  investment   that  may  be  made  to  pay  large  returns. 

If  I  were  asked  to  lay  down  a  rule  for  effective  advertising,  I 
should  say:  Take  a  liberal  supply  of  simple,  honesl  farts  and  mix 
them  with  an  equal  portion  of  ordinary  common-sense.  You  must 
study  the  people  to  whom  you  want  to  talk,  and  you  must  talk  to 


136  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

them  in  a  way  that  will  interest  and  appeal  to  them.  You  must  tell 
them  the  things  they  want  to  know  about  your  bank — not  all  at 
once,  but  one  point  at  a  time ;  remembering  always  that  the  one 
essential  point  is  to  reach  just  as  many  people  as  possible,  and  to 
interest  them  in  your  particular  bank. 

Above  all,  advertising  to  be  effective  must  be  persistent.  A 
common  mistake  is  to  look  for  results  too  soon.  When  a  farmer 
plants  his  wheat  in  the  fall,  he  does  not  expect  a  harvest  in  a  week 
or  a  month ;  when  you  give  an  order  for  a  ten-story  office  building, 
you  do  not  go  around  to  the  site  the  following  day  and  expect  to 
find  a  completed  building.  The  farmer  knows  he  must  wait  until 
the  seasons  and  the  chemicals  of  the  earth  work  their  changes ;  and 
you  know  that  your  building  must  proceed  by  gradual  stages — brick 
upon  brick,  until  finally  finished.  So  it  is  with  advertising.  The 
first  insertion  does  not  influence  the  public  mind,  nor  the  last.  But 
one  added  to  the  other,  everyone  gathering  strength  from  those 
that  precede  it,  gradually  influence  the  public  mind  and  bring  to 
your  bank  the  business  you  desire. 

Public  opinion  moves  slowly,  but  it  moves  with  irresistible  force. 
It  may  require  some  time  to  steer  it  into  your  channels,  but  by  per- 
sistent advertising  you  can  control  it;  and  once  under  control  it 
gathers  force  as  a  snowball  rolling  down  the  mountain  side  gathers 
snow. 

A  very  interesting  experiment  was  made  a  short  time  ago  in  one 
of  our  great  rolling-mills.  A  bar  of  steel  weighing  half  a  ton  was 
suspended  vertically  by  a  slender  chain.  Near  by  a  cork  from  a 
bottle  was  suspended  by  a  silk  thread.  The  cork  was  started  to 
swinging  so  that  it  struck  gently  against  the  steel  bar.  Of  course, 
it  made  not  the  slightest  impression.  But  the  motion  of  the  cork 
was  continued,  and  at  regular  intervals  it  struck  the  great  bar  of 
steel  in  exactly  the  same  place.  Five  minutes  passed  and  still  no 
effect  was  noted  on  the  bar.  After  ten  minutes,  however,  the  bar 
gave  evidence  of  feeling  uncomfortable.  A  sort  of  nervous  chill 
crept  over  it.  At  the  end  of  twenty  minutes  the  chill  gave  way  to 
distinct  vibrations,  and  fifteen  minutes  later  the  great  bar  was 
swinging  like  the  pendulum  of  a  clock.  A  single  week  or  month 
of  advertising  is  merely  a  blow  or  two  of  the  cork  against  the  bar  of 
steel.     Its    effect  is   absolutely   nothing.     It   is   money   and    effort 


GENERAL  BANKING  SECTION  1 37 

wasted — but  the  continuous,  persistent  hammering,  week  after  week, 
month  after  month,  is  just  as  sure  to  start  the  pendulum  of  business 
swinging  your  way  as  day  is  to  follow  night. 

And  this  persistency  must  manifest  itself  in  every  feature  of 
your  advertising.  If  you  use  newspapers  or  periodicals,  you  must 
use  them  regularly,  and  the  advertisements  must  be  changed  at 
least  every  second  or  third  insertion,  in  order  that  they  may  appeal 
to  the  reason  of  the  reader  as  well  as  attract  his  attention.  If  you 
use  the  mails  in  direct  advertising,  you  must  use  them  continuously, 
sending  out  something  every  two  or  three  weeks — or  at  least  every 
month.  My  own  idea  is  that  the  newspapers  and  the  mails  should 
be  used  conjointly,  the  one  following  up  and  supplementing  the 
other. 

Now,  just  a  word  as  to  printed  matter.  This  is  an  essential 
feature  of  modern  advertising,  and  the  one  thing  to  remember  in 
regard  to  it  is  that  to  be  effective  it  must  be  of  high  quality.  In 
direct  advertising  postage  is  always  a  large  end  of  the  expense,  and 
as  it  costs  just  as  much  to  send  out  a  cheap,  poorly  printed  booklet 
or  folder  as  it  does  one  that  is  artistic  and  handsome  in  its  get-up, 
it  becomes  apparent,  even  without  the  use  of  a  powerful  micro- 
scope, that  the  saving  of  a  few  dollars  in  the  printing  bill  at 
the  expense  of  effectiveness  is  mighty  poor  economy.  If  you 
are  going  to  issue  a  circular  or  a  booklet — or  even  a  little  statement 
folder — be  sure  that  it  is  good  enough  to  represent  your  bank. 
Many  a  good  and  worthy  institution  is  very  sadly  misrepresented 
by  its  printed  matter.  It  is  a  good  thing  to  remember  always  that, 
when  you  send  out  an  advertisement,  either  through  the  newspapers 
or  through  the  mails,  you  are  sending  a  personal  representative  to 
carry  the  story  of  your  bank  to  the  people  with  whom  you  hope  to 
do  business.  And  it  is  just  as  essential  that  your  printed  matter  be 
neat  and  attractive  in  appearance  as  it  is  that  you  yourself  should 
have  on  a  collar  and  a  decent  suit  of  clothes  during  business  hours. 
First  impression-,  are  lasting,  and  when  you  are  after  business  it  is 
absolutely  essential  that  the  impression  you  make  on  prospective 
"customers  by  your  advertising  should  be  of  a  character  to  attract 
rather  than  repel  them. 

Another  thing:     Bank  advertising  above  all  else  must  be  digni- 
fied.    It  never  pays  to  try  to  be   funny  or  frivolous  in  an   adver- 


[38    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

tisement  that  is  going  out  broadcast  to  all  sorts  of  people.  Fully 
three-fourths  of  them  will  misunderstand  it,  and  the  other  fourth 
will  lower  their  mental  rating  of  you  several  pegs.  It  is  amazing 
how  easy  it  is  to  get  ourselves  misunderstood,  and  how  often  our 
reputations  are  damaged  by  a  carelessly  uttered  word. 

It  has  often  been  said  that  advertising  is  something  that  you 
have  to  take  on  trust.  Advertisers  say  that  it  pays.  People  gen- 
erally believe  that  it  is  profitable,  but  how  are  you  going  to  prove 
it  ?  Savings  banks,  of  course,  especially  those  doing  a  banking-by- 
mail  business,  can  trace  definite  results ;  but  how  can  it  be  proven 
that  national  banks  and  trust  companies  reap  any  real  benefit  from 
the  money  they  spend  in  advertising? 

The  president  of  one  of  the  big  trust  companies  in  Chicago  re- 
cently said:  "Advertising  is  all  bosh.  I  don't  believe  we  get  any 
tangible  returns  at  all  from  the  money  we  spend  in  that  way.  I 
figure  that  it  costs  us  just  that  much  to  stand  in  with  the  news- 
papers." Now  there  is  a  man  who  has  made  a  success  of  his  bank- 
ing business — a  capable  business  man,  a  shrewd  financier ;  yet  a  man 
who  could  talk  the  most  absurd  nonsense  when  he  attempted  to 
discuss  a  feature  of  his  business  that  he  had  never  taken  the  trouble 
to  study  sufficiently  to  become  familiar  with.  If  one  of  his  clerks 
had  wasted  a  dime  in  an  ill-advised  investment  in  steel  pens  or  lead 
pencils,  he  would  have  called  him  down  for  it.  Yet  he  was  himself 
spending  several  thousands  of  dollars  a  year  for  something  that  he 
declared  was  absolutely  worthless.  Queer  notions  people  have  on 
this  subject  of  advertising. 

But  does  advertising  pay?  Can  we  prove  it?  I  have  been 
asked  that  cmestion  so  often  by  bankers  and  others  that  it  has 
1  »ccurred  to  me  that  about  the  best  thing  I  can  do  at  this  convention 
is  to  attempt  to  answer  it.  As  a  matter  of  fact,  it  is  one  of  the 
easiest  of  advertising  problems  to  solve.  Banks  and  trust  com- 
panies are  compelled  by  law  to  issue  statements  showing  their  actual 
standing  from  time  to  time.  These  statements  tell  the  whole  story, 
and  tell  it  truly.  You  can  read  it  for  yourself  in  your  own  city  or 
town,  if  you  care  to  take  the  trouble.  If,  over  a  given  period  of 
time,  the  banks  that  are  persistent  advertisers  grow  two  or  three  or 
four  times  faster  than  the  banks  that  do  not  advertise,  it  is  at  least 
fair  to  conclude  that  advertising  pays — is  it  not? 


GENERAL  BANKING  SECTION  139 

Take  the  city  of  Pittsburg,  for  instance.  More  money  is  ex- 
pended in  legitimate  bank  and  trust  company  advertising  in  Pitts- 
burg than  in  any  other  city  in  the  country ;  hence  no  better  place 
could  be  selected  for  the  making  of  comparative  figures.  There 
are  a  great  many  banks  in  Pittsburg.  About  half  of  them  are 
known  the  country  over  because  of  their  liberal  advertising.  The 
other  half  do  not  believe  in  advertising,  on  the  general  plea  that 
they  can  use  their  money  to  better  advantage.  Possibly  they  can, 
but  figures  are  against  them.  I  have  gone  back  over  the  statements 
of  the  last  five  years,  comparing  the  growth  of  the  banks  that  have 
advertised  continuously  with  that  of  the  banks  that  have  advertised 
only  now  and  then,  or  not  at  all :  and  this  is  what  I  find :  During 
the  five  years  the  banks  that  have  advertised  continuously  have  in- 
creased 38  per  cent,  in  assets  and  85  per  cent,  in  deposits.  The 
banks  that  have  not  advertised  have  increased  27  per  cent,  in  assets 
and  n  per  cent,  in  deposits.  This  record  is  affected  necessarily  by 
the  numerous  combinations  of  recent  years,  but  these  have  been 
eliminated  so  far  as  possible,  and  the  figures  given  err  on  the  side 

conservatism  rather  than  otherwise. 

But  come  down  to  the  last  year,  the  year  that  has  tried  men's 

•Is,  and  that  has  caused  banking  institutions  as  many  bad  half- 

urs  as  any  year  in  the  last  quarter  of  a  century.  In  times  like 
these  the  cumulative  force  of  advertising  ought  to  make  itself  felt,  if 
it  ever  does,  and  hence  a  comparative  record  of  the  past  year  is  even 

>re  of  a  test  than  the  record  of  five  years.  The  record  of  a  single 
year  is  also  much  more  accurate,  as  it  is  possible  to  include  a  much 
larger  percentage  of  the  banks  without  running  against  combina- 
tions that  swell  the  figures  abnormally.  And  here  is  the  story  the 
year  has  told:  In  assets  the  advertising  banks  have  gained  21 
per  cent. ;  the  non-advertisers  have  lost  5  per  cent.  In  capital  the 
advertisers  have  rained  T5  per  cent.;  the  non-advertisers  have  lost 
II  per  cent.  In  surplus  the  advertisers  have  gained  16  per  cent.; 
the  non-advertisers  have  gained  10  per  cent.  In  deposits  the  adver- 
tisers  have  gained   22   per  cent.;  the  non-advertisers   have  lost    7 

r  rent.      In  other  words,  the  hanks  that  have  been  persistent  ad- 

shown   substantial   gains  in   every   essential    feature. 

The   banks   that   have   not   advertised    have    lost    in    everything  but 

surplus,  and  the  gain  there  is  nol   nearly  so  greal    as  in  the  otl    r 


1 4o    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

class.  It  is  interesting  to  note,  in  looking  over  the  records,  that 
only  one  bank  in  the  advertising  class  shows  any  loss,  and  that  was 
caused  by  the  withdrawal  of  a  constituent  institution;  while  among 
the  banks  that  have  not  advertised  there  are  only  three  or  four  that 
do  not  show  a  loss  in  both  deposits  and  assets. 

Is  there  any  indication  in  all  these  figures  as  to  the  value  of 
intelligent  advertising?  Do  they  answer  the  question  as  to  whether 
or  not  we  can  prove  that  advertising  pays?  Why,  if  it  were  possible 
to  present  the  same  proof  to  the  average  manufacturer  or  merchant, 
he  would  double  his  advertising  appropriation  without  a  moment's 
hesitation.  It  is  the  most  absolutely  convincing  proof  of  the  tangi- 
ble value  of  intelligently  used  printers'  ink  that  has  ever  been  pre- 
sented, and  I  am  glad  to  be  able  to  bring  it  to  you  just  at  this 
time,  when  so  many  people  are  inclined  to  cut  down  their  advertis- 
ing until  financial  conditions  improve.  The  very  time  when  adver- 
tising counts  for  most,  when  it  is  most  valuable  to  you,  is  when 
business  conditions  are  adverse.  In  times  of  prosperity  business 
comes  easy  and  everybody  feels  the  benefit.  In  times  of  depression 
it  is  the  bank  that  has  become  firmly  intrenched  in  the  hearts  of  the 
public  that  continues  to  grow  in  strength  and  volume  of  business. 

There  is  a  very  important  feature  that  lies  back  of  success  in  all 
advertising  campaigns,  and  that  is  the  personal  equation.  In  other 
words,  the  bank  itself  has  got  to  make  good.  You  can  talk  about 
your  strength  and  your  courteous  treatment  of  customers  until  you 
are  black  in  the  face,  but  if  you  have  not  got  the  strength,  and  if 
you  are  not  actually  courteous  and  obliging  in  your  business  deal- 
ings, you  will  not  get  any  permanent  good  out  of  your  advertising. 
Advertising  will  draw  people  to  your  bank,  but  it  will  not  make 
them  permanent  customers.  It  is  the  man  who  dominates  the  policy 
of  the  bank  who  counts  in  the  permanent  upbuilding  of  the  institu- 
tion, and  all  the  advertising  in  the  world  will  not  bring  satisfactory 
results  if  the  man  himself  does  not  make  good. 


GENERAL  BANKING  SECTION  141 

BANK  ADVERTISING 

ADDRESS  DELIVERED  BY  FRANCIS  R.  MORISON,  AUDITOR  AND  ADVERTISING  MANAGER 
OF  THE  CITIZENS*  SAVINGS  AND  TRUST  COMPANY,  OF  CLEVELAND,  OHIO,  BEFORE 
THE   BANKERS'    ADVERTISING    CLUB   OF   PITTSBURG,    PA. 

The  last  few  years  have  brought  many  changes  in  the  methods 
employed  by  banks  and  trust  companies  in  extending  the  business  of 
their  institutions.  The  very  fact  that  you  gentlemen  have  con- 
sidered it  advisable  to  organize  the  "Bankers'  Ad  Club"  of  Pittsburg 
is  in  itself  an  evidence  that  you  realize  and  appreciate  the  benefits 
to  be  derived  from  dignified,  yet  progressive,  publicity.  It  is  cer- 
tainly one  of  the  highest  tributes  to  advertising,  that  men  engaged 
so  actively  in  the  many  problems  of  finance  deem  it  of  sufficient 
importance  to  meet  at  stated  periods  in  order  to  discuss  the  prin- 
ciples involved  in  the  expenditure  of  advertising  appropriations,  and 
I  am  sure  that  the  effect  of  such  discussions  will  exercise  a  stimu- 
lating influence  on  bank  advertising,  not  only  in  this  city,  but 
throughout  the  country  at  large. 

Advertising  is  a  feature  of  the  banking  business  which  is  perhaps 
the  least  understood,  and  yet  it  is  becoming  more  and  more  an  essen- 
tial factor.  It  seems  pertinent  to  treat  this  subject  at  some  length 
because  of  the  presence  at  this  meeting  of  a  large  number  of 
bankers,  every  one  of  whom  is  intent  upon  increasing  his  business. 
Bankers,  as  a  class,  realize  the  necessity  of  publicity,  but  the  ques- 
tion which  troubles  them  is  how  to  advertise  in  order  to  obtain  the 
largest  returns  for  the  smallest  expenditure. 

And  now  a  few  words  as  to  this  expenditure  of  appropriations. 
It  recently  became  known  that  the  chief  executive  officer  of  a  large 
trust  company  in  the  East  investigated  personally  the  items  expend- 
ed for  publicity  by  his  company.     He  found  that  the  appropriation 
had  been  placed  in  the  hands  of  an  advertising  agency,  which  had 
used  a  large  number  of  publications  practically  possessing  no  ad- 
vertising value  whatever.     This  particular  instance  is  cited   with  a 
view  to  calling  the  attention  of  officers  of  banks  and  trust  companies 
nerally  to  the  ini])ortancc  of  seeing  that  the  large  appropriations 
■   aside  for  advertising  are  spent  judiciously,  and  to  warn  them 
ainst  the  profligate  waste  of  money  entailed  by  the  promiscuous 
placing  of  advertisements  in  newspapers  and  journals  without  re- 
gard to  their  circulation  and  clientage. 


i42  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

In  the  case  of  small  institutions,  one  of  the  officers  should  syste- 
matically devote  a  portion  of  his  time  to  the  direction  of  the  adver- 
tising, as  the  subject  really  requires  the  attention  of  one  man  to 
maintain  fixed  policies  which  local  conditions  and  environment  make 
advisable. 

In  the  case  of  larger  banks  and  trust  companies  a  regular  ad- 
vertising department  should  be  organized  and  placed  in  charge  of 
an  officer  of  the  institution.  I  am  sure  that  many  of  you  have  in 
mind,  when  I  speak  of  the  officer  in  charge  of  the  bank's  advertising, 
merely  a  man  who  sits  down  and  writes  newspaper  advertisements, 
booklets,  and  other  literature.  Let  me  impress  upon  you,  however, 
that  the  writing  is  only  a  small  part  of  the  duties  devolving  on  such 
an  officer.  He  must  learn  and  become  conversant  with  the  circula- 
tion of  the  different  newspapers,  and  he  must  become  acquainted 
with  the  classes  of  people  which  they  reach.  This  knowledge  can 
be  secured  by  intimate  acquaintance  with  the  conductors  of  news- 
papers of  high  standing,  and  advertising  managers  of  magazines 
and  other  publications.  He  must  become  familiar  with  the  many 
propositions  which  are  submitted  to  him,  such  as  street-car  adver- 
tising, programs,  catalogues ;  and  be  able  to  discriminate  between 
the  mediums  which  bring  business  to  his  institution  and  those  in 
which  advertising  would  be  absolutely  a  waste  of  money.  He  must 
have  at  least  a  smattering  knowledge  pertaining  to  the  mechanical 
part  of  advertising,  such  as  the  lay-out  of  copy,  preparation  of 
dummies,  the  different  styles  of  type,  the  comparative  merits  of 
electrotypes,  zinc  etchings,  half-tones,  and  other  methods  of  illus- 
trating. His  knowledge  in  these  directions,  combined  with  his 
general  familiarity  with  financial  subjects,  will  then  enable  him  to 
obtain  results  commensurate  with  the  time,  attention,  and  money 
expended. 

There  are  many  psychological  principles  involved  in  advertising, 
and  it  is  most  important  that  every  student  of  advertising  should 
know  something  concerning  the  modern  discoveries  of  this  science. 
There  are  many  ways  in  which  we  make  an  impression  upon  the 
mind  of  the  prospective  client — one  through  the  intellect,  another 
through  the  emotions,  and  finally  through  the  will.  It  is  readily 
seen,  therefore,  that  the  connection  between  psychology  and  adver- 
tising might  be  summed  up  in  one  word,  "persuasion,"  the  steps  to 


GENERAL  BANKING  SECTION  143 

which  are:  attracting-  attention,  inspiring  interest,  and  creating  de- 
sire. Once  we  arrive  at  this  last  stage,  we  have  succeeded  in  our 
advertising  effort  by  securing  the  surrender  of  the  human  will. 

When  the  advertising  manager  has  acquired  and  mastered  all 
these  fundamental  principles,  he  is  ready  to  do  successfully  the 
practical  work  of  preparing  advertising  matter  for  his  institution. 
When  we  speak  of  advertising  matter,  it  must  be  understood  that 
we  include  all  of  the  matter  used  in  extending  the  interests  of  the 
institution.  There  are  a  number  of  ways  in  which  any  bank  comes 
into  possession  of  a  list  of  prospects.  It  makes  no  difference  Jwzv 
the  manager  secures  his  lists ;  the  field  must  be  carefully  cultivated 
and  no  stone  left  unturned  in  the  way  of  securing  a  hearing.  He 
should  install  a  follow-up  system  which  must  be  carefully  mapped 
out  to  meet  the  individual  requirements  of  his  institution.  All 
letters  sent  out  must  be  well  written  and  to  the  point,  one  communi- 
cation following  the  other  with  consecutiveness  and  consistency. 
There  must  be  real  system.  He  must  be  thoroughly  informed  con- 
cerning the  new  accounts  opened  as  a  result  of  these  efforts,  for 
nothing  will  show  weakness  and  lack  of  business  thoroughness  more 
quickly  than  to  continue  sending  soliciting  letters  to  the  person  who 
has  already  opened  an  account,  urging  him  to  further  the  claims  of 
the  advertiser. 

It  is  frequently  argued  by  bankers,  when  discussing  advertising, 
that  it  is  the  poverty  of  subjects  to  which  is  due  very  largely  the 
stereotyped  advertising  which  is  done  by  nine-tenths  of  the  banks  in 
the  United  States.  This  advertising,  as  is  well  known  to  you, 
generally  consists  of  merely  the  titles  of  officers,  capital,  and  per- 
haps a  few  ambiguous  phrases  concerning  accommodations,  and 
the  assurance  that  the  bank  works  along  conservative  lines.  I  ac- 
that  the  number  of  subjects  is  somewhat  limited,  but 
nevertheless  I  assert  most  positively  that  they  admit  of  endless  varia- 
tions, and  that  the  themes  we  possess  have  by  no  means  been 
exhausted. 

Busim  tting  qualities  arc  imparted  to  financial  advertising 

chiefly  through  the  channel  of  literary  composition.  I'.y  reason  of 
the  ultra-con  ervative  nature  of  bank  and  trust  company  methods, 

art  of  producing  ive  advertising  literature  is  difficult.     Its 

ts  are  mi  cting.     it  imposes  the   most  severe  test 


144    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

upon  the  writer.  It  matters  not  how  little  advertising  may  be  done ; 
it  is  essential  that  whatever  is  done  be  done  well ;  otherwise  the 
matter  is  not  read,  and  the  expenditure  is  wasted. 

The  greatest  care  should  be  exercised  to  make  the  advertising 
at  all  times  dignified.  In  fact,  nothing  could  be  more  prejudicial 
to  the  progress  of  a  financial  institution  than  an  undignified  bid  for 
business.  Sensational  illustrated  cuts  in  the  newspapers,  for  in- 
stance, always  suggest  to  my  mind  a  man  wearing  a  dress  suit 
embellished  with  a  red  necktie  and  tan  shoes. 

It  is  impossible  to  determine  the  exact  value  of  the  various  ad- 
vertising media.  But  after  fourteen  years  of  experience  in  bank 
advertising,  I  am  emphatic  in  stating  that  a  large  part  of  my  appro- 
priation belongs  rightly  to  the  daily  newspapers  and  other  generally 
acknowledged  publications. 

An  important  point,  however,  in  newspaper  advertising  is  that 
it  must  be  consecutive,  consistent,  and  continuous  to  produce  the 
best  results.  It  is  better  to  take  three  inches  fifty  times  than  to  take 
one  hundred  and  fifty  inches  once.  It  is  the  steady  dropping  of 
water  that  wears  away  the  rock,  and  it  is  the  constant  advertising 
on  the  part  of  a  bank  or  trust  company  which  impresses  the  people 
with  the  idea  that  it  is  the  one  financial  institution  with  which  to 
do  business.  Placing  one  advertisement  in  a  paper  to  see  how  it 
will  turn  out  is  the  rock  on  which  is  wrecked  many  a  bark  of  ad- 
vertising enterprise.  The  results  are  almost  invariably  similar  to 
the  Indian  who  was  told  how  soft  it  was  to  sleep  on  a  feather  bed. 
He  arose  after  a  comfortless  night,  when  he  had  placed  one  lone- 
some hen's  feather  between  his  shivering  body  and  the  naked  rock, 
and  remarked:  "Humph!  white  man's  feather  bed  heap  dam 
fraud." 

Advertising  by  means  of  booklets  and,  printed  matter  is  receiving 
a  large  share  of  attention.  The  success  of  booklets  depends  more 
upon  the  way  arguments  are  presented  than  upon  the  grammatical 
construction.  Long  sentences  and  ambiguous  phraseology  are  of 
less  service  than  simple,  direct  talk  which  can  be  understood  equally 
by  the  ignorant  classes  and  the  wealthy  or  the  well  educated.  The 
profoundest  students  of  literature  agree  that  the  King  James  version 
of  the  Bible  is  the  purest  English  in  existence,  and  yet  it  is  under- 
stood by  millions  of  ignorant  people  on  both  sides  of  the  ocean. 


GENERAL  BANKING  SECTION 


145 


Simplicity  is  appreciated  by  everybody,  because  it  is  understood  by 
everybody. 

It  is  not  necessary  that  these  small  booklets  or  folders  should  be 
extravagantly  gotten  up,  but  in  all  cases  artistic  printing  and  good 
paper  should  be  utilized.  The  mission  of  booklets  is  to  educate  the 
people  by  forceful  arguments,  as  to  the  numerous  ways  in  which 
the  bank  or  trust  company  can  be  of  service  to  them. 

Banking  by  mail,  as  practiced  by  the  banks  in  Pittsburg  and 
Cleveland,  has  become  somewhat  a  "thorn  in  the  flesh"  to  a  great 
many  bankers  throughout  the  country,  because  they  feel  that  this 
banking  by  mail  is  encroaching  upon  their  domains.  I  wish,  how- 
ever, to  emphasize  another  side  of  the  question,  which  is  to  the  effect 
that  this  advertising  carried  on  by  the  banks  of  Pittsburg  and  Cleve- 
land is  in  reality  a  decided  benefit  to  the  local  bank.  The  adver- 
tising banks  place  their  announcements  extensively  in  the  current 
magazines  and  agricultural  journals,  whose  circulations  aggregate 
many  millions  of  readers,  and  a  careful  perusal  of  these  advertise- 
ments will  show  that  the  majority  of  them  are  written  with  a  view 
to  educating  the  masses  to  appreciate  the  benefits  derived  by  those 
who  cultivate  the  habit  of  saving  money.  The  amount  of  good 
accomplished  by  this  education  will  never  be  fully  known,  but  it 
undoubtedly  is  the  means  of  creating  a  large  number  of  new  ac- 
counts. And  while  many  of  these  new  accounts  reach  the  banking- 
by-mail  institutions,  in  my  judgment  a  far  larger  proportion  of  this 
new  business  is  given  to  the  advertising  bank  at  home  which  acts  as 
a  stimulus  for  local  business. 

During  the  year  1903,  at  which  time  I  was  an  officer  of  a  trust 
company  in  an  eastern  city,  I  made  a  thorough  investigation  into 
the  effect  of  an  advertising  campaign  which  was  being  conducted 
in  that  city  by  one  of  the  banking-by-mail  banks,  through  direct 
circularization,  and  watched  very  closely  the  withdrawals  from  our 
institution.  I  found  at  the  end  of  three  months  that  the  with- 
drawals and  closed  accounts  were  no  greater  than  they  had  been  in 
the  corresponding  periods  of  the  preceding  year,  and  T  learned,  on 
the  other  hand,  that  the  small  accounts  opened  during  that  time 
largely  exceeded  those  opened  during  the  same  period  of  the  pre- 
vious year. 

Another  point  which  is  worthy  of  consideration  in  this  conncc- 
10 


I46    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

tion  is  to  the  effect  that,  whereas  the  volume  of  business  obtained  by 
the  Pittsburg  and  Cleveland  banks  is  extensive  by  reason  of  the 
enormous  territory  covered,  yet  the  business  from  each  locality  is 
too  small  to  affect  in  any  appreciable  way  the  deposits  of  the  local 
banks,  and  I  am  firmly  convinced  that  the  loss  of  a  few  accounts 
by  any  bank  because  of  the  larger  rate  of  interest  and  other  in- 
ducements offered  by  the  banking-by-mail  institutions  is  largely 
overbalanced  bv  the  new  accounts  which  are  the  actual  result  of  the 
work  done  by  these  banks  along  educational  lines. 

I  desire,  however,  particularly  to  emphasize  the  advantage  of 
banking  by  mail  for  the  outside  bankers  themselves.  A  large 
number  of  banks  in  all  sections  of  the  country  are  beginning  a 
vigorous  campaign  for  the  business  of  the  rural  population  in  their 
own  immediate  vicinities.  Ready  money  is  needed  by  the  farmers 
only  at  certain  periods  created  by  the  seasons.  This  leads  to  the 
sequestration  of  a  vast  amount  of  capital  in  secret  hiding-places  of 
countless  farm-houses,  where  it  is  lying  idle  and  of  no  use  to  any- 
one. Funds  of  this  character,  although  they  appear  insignificant, 
make  a  grand  total  which  is  well  worth  going  after  by  any  bank. 
Only  28  per  cent,  of  the  inhabitants  of  the  United  States  live  in 
cities  or  towns  where  there  are  savings  banks,  while  72  per  cent, 
live  where  there  are  no  such  facilities.  Out  of  the  twenty-nine 
million  people  who  are  earning  a  living  in  one  way  or  another,  over 
two  million  are  engaged  in  agricultural  pursuits,  the  majority  of 
whom  live  on  farms  or  in  small  villages;  and  while  it  is  true  that 
some  of  this  number  are  not  earning  as  much  as  residents  of  larger 
cities,  yet  as  a  class  they  are  thrifty  and  saving,  and,  moreover,  their 
expenses  of  living  are  less  than  those  of  their  metropolitan  brethren. 

In  order  properly  to  invest  the  income  of  the  farmer  during  1905, 
which  exceeded  the  year  1904  by  $256,000,000,  1,754  new  banks 
have  been  established.  There  has  been  a  general  cancellation  of 
mortgages,  and  many  of  the  farmers  are  loaning  their  money,  where- 
as only  a  few  years  ago  they  were  borrowing.  In  the  education  of 
these  people  as  to  the  advantages  of  the  banks  in  the  near-by  cities 
(regardless  of  the  rates  of  interest  which  are  paid),  and  the  fact 
that  it  is  no  longer  necessary  to  pay  a  visit  in  person  to  the  bank, 
lies,  in  my  judgment,  the  solution  of  the  banking-by-mail  proposition. 


PART  II. 
BANKING  REFORM  AND  CURRENCY  SECTION 


INSURING  THE  DEPOSITS  IN  NATIONAL  BANKS 

BY   JOHN   SCHUETTE,  PRESIDENT  OF  THE    MANITOWOC   SAVINGS   BANK,   MANITOWAC, 
WIS. 

I  have  been  asked  at  various  times  to  draft  a  bill  that  should 
embody  an  idea  of  a  suitable  plan  for  insuring  depositors  in  national 
banks,  and  to  explain  certain  features  showing  how  such  a  plan 
could  be  accomplished.  I  have  accordingly  drafted  such  a  bill,  and 
prepared  the  following  argument,  which  will  give  all  a  better  oppor- 
tunity to  acquaint  themselves  with  the  plan,  and  will  enable  those 
more  directly  interested  to  determine  how  such  a  measure  would 
affect  their  own  interests.  I  am  no  attorney,  and  do  not  presume 
to  believe  that  the  act  I  here  offer  is  perfect.  I  think,  however,  that 
it  is  sufficiently  clear  to  convey  its  intent. 

"We  have  the  safest  currency  on  earth.  Now  let  us  make  our 
deposits  as  safe,  and  then  our  banking  system  will  be  unexcelled." 

Through  the  law  of  averages,  every  interest  can  be  insured 
against  loss,  and  nearly  every  interest  is  insured.  The  first  step  was 
insurance  against  loss  by  fire.  It  proved  so  successful  that  insurance 
was  extended  to  many  other  lines — against  loss  to  ships,  cargoes, 
etc.,  by  the  elements  of  nature ;  against  loss  by  accidents  or  death ; 
against  loss  by  failure  of  a  creditor;  against  burglary  of  banks,  and 
loss  from  dishonesty  of  employees.  We  can,  indeed,  insure  our- 
selves against  almost  any  kind  of  a  loss  except  that  of  our  most 
valuable  asset,  our  savings  or  surplus  money.  Whether  we  keep 
our  money  in  our  pockets,  or  hoard  it  at  home,  or  deposit  it  in 
banks,  we  are  liable  to  lose  it.  The  constant  fear  for  its  safety 
hangs  like  a  pall  over  nearly  every  one  of  us,  and  when  bank  failures 
are  frequent,  this  fear  breaks  out  into  a  panic  which  seizes  the  whole 
population  and  carries  ruin  in  its  track. 

It  seems  impracticable  to  insure  the  money  of  each  individual 
in  his  pocket,  in  his  house,  or  in  his  bank.  The  only  practical  and 
safe  way  is  to  deposit  all  surplus  money  in  banks,  and  then  let  the 
banks  insure  all  such  deposits  in  total.     This  can  be  done  in  two 

149 


150    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

ways.  Insurance  corporations  may  be  organized  to  insure  bank 
deposits.  This,  however,  could  be  done  only  at  great  cost,  and  even 
then  it  would  not  inspire  the  depositors  with  that  confidence  so  es- 
sential in  removing  all  panicky  fear.  The  second  plan,  and  the  only 
one  which  deserves  consideration,  as  it  is  the  most  convenient,  the 
safest,  and  the  cheapest,  is  that  of  a  bankers'  mutual  insurance  plan 
under  government  control.  The  government  might  establish  such  a 
plan  with  the  stroke  of  a  pen,  to  speak  in  common  parlance,  and 
with  but  little  extra  expense;  while  corporations  would  have  to 
spend  millions  to  get  the  business,  and  they  would  require  many 
years  to  get  it  all. 

There  seems  to  me  to  be  but  little  doubt  that,  unless  a  mutual 
plan  is  adopted,  insurance  corporations  will  be  organized  in  the  near 
future  to  insure  the  deposits  in  bank,  and  practically  every  bank 
will  be  forced  to  take  insurance  of  this  kind,  though  under  what  dis- 
advantageous conditions !  The  cost  would  be  double  that  under  the 
plan  I  am  about  to  propose,  and  the  depositors  would  not  have  the 
same  feeling  of  confidence  by  any  means  that  they  would  have  if 
the  insurance  were  under  the  control  of  the  government. 

It  may  be  argued  that  the  insurance  of  deposits  should  not  be 
compulsory,  but  voluntary.  Freedom  in  this  respect  may  be  per- 
mitted, and  the  banks  that  are  insured  might  be  designated  as 
secured  national  banks.  But  would  not  competing  banks  in  the 
same  locality  be  compelled  to  insure  its  depositors,  till  finally  all 
would  have  to  come  into  the  mutual  plan,  whether  it  were  optional 
or  compulsory? 

The  chief  objection  to  this  insurance  is  that  at  first,  and  perhaps 
for  some  time,  the  number  of  banks  to  join  in  the  mutual  system 
might  not  be  sufficient  to  insure  unquestionable  success.  The  main 
element  of  safety  in  any  insurance  lies  in  the  large  number  of  risks, 
spread  over  a  large  territory,  within  the  shortest  possible  time. 
Thus  the  desired  general  average  is  secured.  Such  an  average 
would  be  immediately  secured  under  the  compulsory  insurance  plan, 
since  it  would  embrace  at  once  every  bank ;  and  the  prospect  of  suc- 
cess from  the  beginning  would  be  much  brighter. 

The  direct  benefits  derived  from  the  mutual  plan  would  be,  first, 
that  a  bank  would  be  secure  against  loss  of  deposits  in  its  reserve  or 
in  any  other  bank ;  second,  that  deposits  would  be  largely  augmented 


BANKING  REFORM  AND  CURRENCY  SECTION  151 

when  it  was  known  that  they  were  perfectly  safe;  third,  that  a 
smaller  cash  reserve  would  be  necessary.  This  point  is  well  illus- 
trated in  a  circular  by  Horace  Lloyd,  cashier  of  the  National  Bank 
of  Phoenixville,  Pa.,  in  which  he  says : 

And  now  I  will  show  that  the  depositors  themselves  would  be  indirectly 
the  ones  to  establish  the  insurance  fund.  Take  for  example  $100,000  of 
deposits.  Most  banks  (those  outside  of  the  redemption  cities)  are  now  re- 
quired to  keep  a  reserve  of  15  per  cent,  of  their  deposits,  which  would  be 
$15,000.  I  propose  to  reduce  this  to  13  per  cent.,  $13,000,  thus  releasing, 
$2,000;  which  sum,  invested  at  5  per  cent.,  would  yield  per  annum  $100, 
which  is  just  the  amount  of  the  insurance  tax.  Could  anything  be  simpler? 
In  fact,  a  reserve  of  even  13  per  cent,  would  not  be  necessary,  as  such  a  thing 
as  a  run  on  a  bank  would  be  unknown.  All  the  reserve  a  bank  would  need 
would  be  sufficient  funds  to  do  business. 

If  anyone  can  devise  a  plan  better  or  simpler,  I  hope  he  will  do  so;  but 
I  think  the  day  is  not  far  distant  when  something  will  be  done  along  this 
line. 

The  ever-existing  dread  of  bank  runs  and  stringency  in  the 
money  market  would  almost  wholly  disappear.  What  a  relief  this 
would  be  to  the  banker!  The  much-discussed  flexible  currency 
would  not  require  our  attention  any  more,  because  a  money  strin- 
gency can  be  brought  about  only  by  a  loss  of  confidence  in  banks 
whose  depositors  are  panic-stricken  and  draw  their  deposits  out  of 
banks  to  put  in  safety  boxes  or  to  hoard  it  at  home. 

This  is  explained  by  Comptroller  J.  H.  Eckels  in  his  report  of 
1893,  on  page  5,  in  which  he  shows  that  in  that  year,  from  May  to 
September,  378  million  dollars  of  deposits  were  drawn  out  of  na- 
tional banks  alone.  This  was  20  per  cent,  of  such  deposits,  and  the 
amount  drawn  from  all  banks  must  have  been  over  1,100  million 
dollars. 

He  further  says  on  page  24: 

The  financial  situation  of  the  past  few  months  was  not  the  result  either 
of  a  lack  in  tlie  volume  of  the  currency,  of  which  there  is  now  a  plethora,  or 
of  a  want  of  elasticity  in  the  present  system  of  issuing  it,  but  arose  from  a 
loss  of  confidence  on  the  part  of  the  people  in  the  solvency  of  the  dis- 
tinctively monetary  institutions  of  the  country.  It  is  worthy  of  note  and 
of  serious  consideration  that  at  the  very  time  the  scarcity  of  currency  for 
business  purposes  was  at  its  height,  the  volume  of  currency  was  increasing 
the  most  rapidly.  The  amount  per  capita  was  much  larger  than  in  recent 
years. 

Unrler  the  same  peculiar  condition  of  affairs,  which  marked  the  monetary 
situation  from  May  to  September,  no  system,  no  matter  how  clastic,  or  volume 


152 


PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 


of  currency  however  large,  could  afford  relief.  As  long  as  confidence  is 
destroyed  and  credit  wanting,  money-hoarding  will  go  on,  and  additional 
issues  but  add  to  the  hoarding,  and  give  but  little  if  any  actual  relief. 

On  the  other  hand,  when  confidence  and  credit  abound,  there  exists 
little  need  for  an  abundant  circulating  medium,  because  under  such  a  con- 
dition of  affairs  the  amount  of  actual  money  required  to  transact  daily  bus- 
iness affairs  is  reduced  to  a  minimum. 

This  is  a  frank  and  sound  declaration,  for  which  ex-Comptroller 
Eckles  deserves  credit. 

So  we  see  that,  if  we  can  retain  confidence,  there  never  will  be 
a  lack  of  money  for  legitimate  purposes.  Even  speculation  or  large 
expansion  of  undertakings  does  not  affect  the  money  matket  gen- 
erally. If  the  1,100  millions  drawn  out  of  the  banks  in  1893  had 
been  used  for  such  purpose,  it  would  only  have  changed  ownership, 
passing  from  hand  to  hand,  from  one  bank  to  another.  It  would 
still  be  there,  circulating  in  the  marts  of  trade. 

It  seems  hardly  necessary  to  enlarge  on  the  benefits  which  would 
follow  the  insuring  of  depositors;  they  are  so  manifold,  and  stand 
out  so  clear  that  anyone  cannot  fail  to  discern  them. 

I  know  that  reminding  one  of  death  or  paying  taxes  is  not  a 
pleasing  subject  to  dwell  upon;  but  if  we  feel  confident  that  after 
death  we  shall  enter  heaven,  the  thought  is  not  so  sad;  or  that 
after  paying  taxes  we  shall  find  we  have  made  a  good  investment, 
and  that  the  continuous  fear  of  a  whole  nation  has  been  transformed 
into  a  feeling  of  serene  safety — to  pay  taxes  would  be  a  pleasure; 
and  such  I  should  consider  it. 

Some  may  ask :  Why  should  banks  be  compelled  to  insure  their 
deposits?  They  are  now  at  a  great  expense  to  safeguard  funds 
mostly  belonging  to  their  depositor,  by  constructing  vaults  and 
safes,  paying  insurance  against  loss  occasioned  by  embezzlement  or 
fraud  of  its  employees,  paying  a  watchman  to  guard  their  property, 
and  doing  all  things  possible  to  make  safe  that  which  is  intrusted 
to  their  care.  Is  it  reasonable  to  ask  them  to  do  more,  to  compel 
them  to  insure  their  depositors?  To  all  of  which  I  answer  "yes." 
The  request  does  not  seem  to  me  unreasonable. 

When  in  doubt  about  a  loan,  do  we  bankers  not  require  that  it 
be  secured  ?  Do  we  not  agree  to  pay  one  hundred  cents  on  a  dollar 
on  all  deposits  ?  Some  may  retort :  "Yes ;  but  we  do  not  propose  to 
pay  for  the  losses  of  our  neighbor  banks."     But  we  must  not  for- 


BANKING  REFORM  AND  CURRENCY  SECTION 


153 


get  that  we  must  and  do  contribute  our  mite  toward  the  mis- 
fortune or  the  result  of  the  wrong-doings  of  others  every  year  of 
our  lives;  we  should  remember  that  misfortune  may  overtake  any 
one  of  us,  and  may  deprive  us  of  the  ability  to  pay  our  obligations, 
in  spite  of  our  intentions  and  efforts;  and  in  this  case,  while  di- 
rectly the  banks  pay  the  insurance  tax,  indirectly  they  will  be  re- 
imbursed by  the  benefits  accruing  almost  from  the  beginning. 

Now,  assuming  that  all  which  has  been  said  is  sound  argument 
in  favor  of  insuring  depositors,  on  what  can  we  base  the  probable 
annual  loss  and  its  consequent  cost  or  tax ;  and  how  can  we  deter- 
mine the  probable  success  of  such  a  measure?  On  this  point  we 
need  not  grope  in  the  dark,  since  we  have  the  most  reliable  govern- 
ment reports  covering  forty  years,  from  the  time  the  national  bank- 
ing system  was  incorporated  to  the  present  time,  in  which  we  have 
a  fund  of  statistics  by  which  the  losses  may  be  ascertained ;  and  a 
better  basis  of  averages  on  which  to  calculate  the  probable  future 
than  any  insurance  company  had  at  its  command  when  preparing 
its  tables. 

We  will  now  see  what  these  reports  show.  My  attention  was 
first  drawn  to  an  insurance  plan  when  reading  ex-Comptroller 
Lacey's  report  of  189 1,  which  shows,  on  page  8,  that  during  the  life 
of  the  national  banking  system,  a  period  of  twenty-nine  years 
in  round  numbers,  the  losses  to  depositors  had  been  $15,459,000,  or 
an  average  of  $533,000  per  annum.  The  average  deposits  for  the 
same  period  were  $1,055,000,000,  indicating  that  the  annual  average 
loss  to  the  creditors  of  national  banks  had  been  only  one-twentieth  of 
1  per  cent. ;  in  other  words,  if  all  national  banks  had  paid  one- 
twentieth  of  1  per  cent,  annually  on  their  average  deposits,  which 
is  equivalent  to  50  cents  on  each  1,000  dollars  annually,  all  deposi- 
tors would  have  been  paid  in  full.  On  the  same  page  it  further 
shows  that  failed  banks  which  were  finally  wound  up  paid  on  an 
average  74.17  per  cent,  in  dividends  to  its  depositors:  and  all  the 
subsequent  reports  of  the  Comptroller  of  Currency  to  date  show 
about  the  same  result.  Now  let  us  see  what  Comptroller  W.  B. 
Ridgeley  says  in  his  report  of  1902,  page  24: 

An  examination  of  the  reports  relating  to  the  liquidation  of  insolvent 
national  hanking  associations  develops  the  fad  thai  the  total  amount  of  claims 
proved  against  all  trusts  placed   in  the  charge  of  receivers  from  the  date  of 


154    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

the  first  failures  in  1865  to  October  31.  1002,  aggregated  $139,389,202,  and 
the  approximate  loss  was  $37,956,941.  Practically  the  affairs  of  every  bank 
which  failed  prior  to  1902  have  been  finally  liquidated;  and  in  calculating  the 
total  amount  of  loss,  it  has  been  assumed  that  trusts  still  open  will  finally 
be  liquidated  at  an  average  loss  not  greater  than  25  per  cent. 

For  the  purpose  of  comparison,  there  is  submitted  herewith  a  statement  of 
the  average  annual  deposits  in  active  national  banks,  and  the  ratio  of  annual 
loss  sustained  by  creditors  of  the  insolvent  national  banks,  to  the  average 
deposits,  together  with  the  amount  of  claims  proved,  and  aggregate  an  average 
sustained  by  creditors : 
Annual  (average)  deposits  in  national  banks  from  1865  to  1902  $1,202,871,178 

Total  claims  proved  against  insolvent  national  banks 139,389,202 

Total  loss  to  creditors,  actual  1865  to  1892,  and  25  per  cent,  esti- 
mate  1893  to    1902 37,956,94! 

Average  annual   loss 998,867 

Average  rate  per  cent,  of  loss  on  claims 27.23% 

Average   (annual)    rate  per  cent,  of  loss  based  on  average  de- 
posits in  active  national  banks 0.083% 

This,  then,  has  been  the  actual  experience  of  our  national  banking  system 
for  a  period  of  nearly  forty  years,  and  approximately  condensed  it  discloses 
the  following  facts:  ten  banks  fail  on  an  average  each  year,  by  which 
25  per  cent,  has  been  lost  to  creditors;  one  million  dollars  has  on  the  average 
been  lost  annually  to  depositors  in  banks  that  failed. 

The  Comptroller's  report  of  1903,  page  95,  shows  that  national 
banks  paid  on  capital  and  deposits,  in  round  numbers,  from  1864 
to  1883,  68  million  dollars,  and  from  1899  to  I9°2,  7  million 
dollars — a  total  of  75  million  dollars — in  war  tax  alone ;  and  they 
have  further  paid  from  1864  to  1903  a  circulation  tax  of  92  million 
dollars.  It  is  estimated  that  the  total  expenses  of  the  Comptroller's 
Department  did  not  exceed  19  million  dollars,  indicating  that  the 
profit  on  circulation  alone  has  been  J2>  million  dollars,  which  would 
have  nearly  paid  all  losses  in  national  banks  twice  over  from  1864 
to  1903.  This  demonstrates  how  easily  the  national  banks  could 
have  mutually  made  up  the  insignificant  sum  of  one  million  dollars 
a  year,  and  no  depositors  would  have  lost  a  penny ;  and  a  deposit 
in  a  bank  would  have  been  considered  as  safe  as  a  government 
bond,  while  a  banker's  standing  in  the  community  would  have  been 
one  of  the  highest  eminence. 

When  we  compare  the  Baltimore  fire,  by  which  a  loss  of  over 
one  hundred  million  dollars  was  sustained  in  a  few  hours,  with  the 
loss  of  one  million  dollars  a  year  in  failed  national  banks,  this  loss 
in  banks  seems  but  a  trifle,  and  shows  that  the  insurance  of  de- 


BANKING  REFORM  AND  CURRENCY  SECTION 


155 


posits  is  not  so  visionary,  and  not  so  large  an  undertaking  as  is 
generally  supposed.  One  single  fire-insurance  company  in  the 
United  States,  with  a  capital  of  only  $1,250,000,  had  insurance  in 
force  in  1903  of  over  $1,285,000,000,  received  nearly  $10,000,000 
in  premiums,  and  paid  a  little  over  $5,500,000  in  losses.  This  com- 
pany alone  could  insure  all  the  deposits  in  national  banks,  which 
are  now  about  $4,500,000,000,  with  far  less  risk  than  it  is  taking 
now. 

As  to  the  legislation  required  to  carry  out  the  insurance  plan, 
the  following  draft  of  a  bill  is  submitted,  and  criticism  invited: 

An  Act  to  insure  depositors  in  national  banks  00  per  cent,  on  their  deposits, 
on  the  mutual  plan,  to  create  and  maintain  funds  therefor,  and  to  amend 
the  National  Banking  Act. 

Be  it  enacted  by  the  Senate  and  House  of  Representatives  in  Congress  as- 
sembled : 

Section  i.  That  there  is  hereby  created  in  connection  with  the  national 
banking  system  a  department  in  the  office  of  the  Comptroller  of  the  Currency 
to  be  known  as  the  Depositors'  Insurance  Department,  over  which  the  Comp- 
troller of  the  Currency  shall  have  full  supervision  and  management,  as  pro- 
vfded  in  this  act. 

He  shall  receive  and  disburse  all  moneys  paid  in  and  belonging  to  the 
several  funds  herein  provided  for,  and  shall  keep  suitable  books  in  which 
shall  be  kept  an  account  known  as  the  Reserve  Fund,  and  an  account  to  be 
known  as  the  Premium  Fund. 

He  shall  also  keep  a  separate  account  with  each  national  bank,  in  which 
he  shall  credit  said  bank  with  all  moneys  paid  by  it  to  the  account  of  said 
Depositors'  Insurance  Department,  and  shall  debit  it  with  its  proportionate 
share  of  losses  paid  from  said  Insurance  Funds. 

He  shall  also  keep  such  other  accounts  as  may  by  him  be  deemed  neces- 
sary, and  shall  have  power  and  authority  to  appoint  such  deputies,  assistants, 
and  clerks  as  may  be  necessary  to  carry  into  effect  the  purposes  of  this  act. 
All  the  expenses  of  this  department  shall  be  paid  by  and  charged  to  the 
Premium    Fund. 

Sec.  2.  All  tke  surplus  funds  which  may  have  been  derived  during  the 
first  fiscal  year  after  the  act  takes  effect  from  the  semiannual  tax  on  circula- 
tion paid  by  national  banks,  after  deducting  therefrom  all  expenses,  shall 
be  paid  in  and  credited  to  the  Premium  Fund  in  the  Depositors'  Insurance 
Department  at  the  beginning  of  the  following  fiscal  year,  and  at  the  beginning 
of  each   fiscal   year   thereafter. 

Sec.  3,  The  Comptroller  of  the  Currency  shall  invesl  the  money  re- 
ceived through  the  Reserve  Fund  in  interest-bearing  bonds  of  the  United  States, 
or  of  any  state,  or  county,  or  incorporated  city  of  the  United  States.  Such 
bonds  shall  be  of  the  following  character:  They  shall  not  yield  less  than 
3  per  cent,  interest  on  their  cost  per  annum,  no  interest  thereon  shall  have 
been   defaulted,  and  no  contest   shall    be   pending   as    to   their  legality.     It  is 


156    PRACTICAL  PROBLEMS  IN  RANKING  AND  CURRENCY 

provided  further  as  to  county  and  city  bonds  that  the  indebtedness  of  such 
counties  or  cities  does  not  exceed  5  per  cent,  of  the  average  assessed  valua- 
tion for  the  three  years  preceding.  All  the  above-named  bonds  shall  be  sub- 
ject to  the  approval  of  the  Comptroller  of  the  Currency.  It  is  provided 
further  that  any  national  bank  may,  in  lieu  of  cash  payment  of  its  1  per 
cent.  Reserve  Fund  dues,  deliver  to  the  Comptroller  of  the  Currency  bonds 
of  the  character  above  described,  at  par  value,  to  be  approved  by  him.  The 
interest  on  all  bonds  in  the  Reserve  Fund  shall  be  collected  by  the  Comp- 
troller of  the  Currency  when  due,  and  remitted  to  the  national  banks  pro- 
portionately to  the  amounts  paid  by  them ;  or  in  case  of  national  banks  that 
have  deposited  their  own  bonds,  the  interest  on  such  bonds  as  they  may  have 
to  their  credit  shall  be  collected  and  forwarded  to  them.  The  remitting  of 
interest  to  national  banks  shall  be  made  at  the  end  of  each  fiscal  year.  Should 
any  of  the  bonds  deposited  in  the  Reserve  Fund  by  any  national  bank  become 
impaired  in  value,  or  interest  defaulted  thereon,  the  Comptroller  shall  re- 
quire others  to  be  substituted  therefor  which  may  be  acceptable  to  him,  or 
else  require  a  like  amount  in  money. 

Sec.  4.  The  Comptroller  of  the  Currency  may  deposit  with  the  Secre- 
tary of  the  Treasury  any  surplus  money  in  the  Premium  Fund;  or  in  case 
such  surplus  should  accumulate  beyond  the  requirement  of  the  department, 
he  may  invest  the  same  in  interest-bearing  bonds  of  the  same  character  as 
provided  by  the  investment  of  the  Reserve  Fund,  the  interest  derived  there- 
from to  be  credited  to  the  Premium  Fund. 

Sec.  5.  The  Comptroller  shall  make  an  annual  report  to  the  Congress 
of  the  United  States  at  the  commencement  of  each  regular  session  thereof, 
setting  forth  therein  a  full  statement  of  the  affairs  of  the  Depositors'  Insur- 
ance Department  for  the  previous  fiscal  year,  and  shall  make  such  recom- 
mendation as  he  may  believe  would  tend  more  fully  to  carry  into  effect  the 
intent  and  purposes  of  this  act. 

Sec.  6.  Every  national  bank  shall,  when  this  act  takes  effect  or  when  it 
shall  be  organized  any  time  thereafter,  file  with  the  Comptroller  of  the 
Currency  a  report  showing  its  capital  and  total  deposits ;  and  at  the  begin- 
ning of  each  fiscal  year  thereafter  it  shall  file  with  the  Comptroller  of  the 
Currency  a  report  showing  its  capital  and  average  deposits  for  the  preceding 
year. 

Sec.  7.  All  national  banks  having  deposits  in  an  amount  greater  than 
their  capital  when  this  act  takes  effect  shall  pay  to  the  Comptroller  of  the  Cur- 
rency, when  this  act  becomes  operative,  1  per  cent,  on  its  total  deposits,  which 
shall  be  credited  to  the  Reserve  Fund ;  and  1  mill  on  its  total  deposits,  which 
shall  be  credited  to  the  Premium  Fund. 

At  the  beginning  of  each  fiscal  year  thereafter  every  national  bank  shall 
pay  to  or  receive  from  the  Comptroller  of  the  Currency  1  per  cent,  on  the 
increase  or  decrease  in  its  average  deposits  of  the  preceding  year,  which 
amount  shall  be  credited  or  charged  to  the  Reserve  Fund,  and  shall  also 
pay  1  mill  on  its  average  deposits  of  the  preceding  year,  which  amount  shall 
be  credited  to  the  Premium  Fund. 

Sec.  8.  All  national  banks  having  less  deposits  than  capital  when 
this  act  takes  effect  shall  pay  to  the  Comptroller  of  the  Currency,  when  this 
act  becomes  operative,   1   per  cent,  on  their  capital,  which  shall  be  credited 


BANKING  REFORM  AND  CURRENCY  SECTION  157 

to  the  Reserve  Fund,  and  1  mill  on  their  capital,  which  shall  be  credited  to 
the  Premium  Fund.  If  at  the  beginning  of  the  following  year  the  deposits 
should  still  be  less  than  the  capital,  then  so  much  of  the  1  mill  premium 
dues  paid  in  the  previous  year  shall  be  refunded  as  may  be  found  overpaid 
on  that  bank's  proportionate  share  of  its  average  deposits  for  the  previous 
year;  and  shall  pay  for  the  current  year  1  mill  into  the  Premium  Fund  on 
its  average  deposits  of  the  preceding  year,  and  every  year  thereafter  until 
such  deposits  shall  exceed  the  capital ;  the  Reserve  Fund  dues  paid  in  the 
previous  year  to  remain  the  same  so  long  as  the  deposits  do  not  exceed  the 
capital.  If,  however,  the  average  deposits  during  the  previous  year  shall 
have  exceeded  the  capital,  then  it  shall  pay  on  the  excess  thereof  1  per  cent, 
into  the  Reserve  Fund,  and  1  mill  into  the  Premium  Fund;  and  shall  further 
pay  for  the  current  year  on  its  average  deposits  of  the  preceding  year  1 
mill  into  the  Premium  Fund;  thereafter  it  shall  be  subject  to  the  same  pro- 
vision as  applied  to  banks  in  Section  7. 

Sec.  9.  All  national  banks  organized  at  any  time  after  this  act  takes 
effect,  which  have  been  reorganized  or  converted  from,  or  consolidated  with, 
any  other  banking  association,  and  have  deposits  in  an  amount  greater  than 
the  capital  when  so  organized,  shall  be  subject  to  the  same  provisions  as 
apply  to  national  banks  in  Section  7,  excepting  that  only  such  a  propor- 
tion of  the  1  mill  Premium  Fund  dues  shall  be  paid  as  the  unexpired  time 
from  the  date  of  organization  to  the  end  of  a  fiscal  year  shall  bear  to  a  whole 
year,  and  that  payment  of  dues  shall  be  made  at  the  time  when  the  bank 
is  authorized  to  do  business. 

Sec.  10.  Any  national  bank  organized  at  any  time  after  this  act  takes 
effect,  and  having  less  deposits  than  its  capital  when  so  organized,  shall  be 
subject  to  the  same  provisions  as  apply  to  national  banks  in  Section  8, 
excepting  that  payment  of  dues  shall  be  made  when  the  bank  is  authorized 
to  do  business. 

Sec.  11.  Whenever  a  national  bank's  total  deposits  at  the  beginning  of 
a  fiscal  year  exceeds  ten  times  its  capital,  and  if  its  average  deposits  for  a 
whole  preceding  year  has  exceeded  ten  times  its  capital,  then  it  shall  on  the 
beginning  of  said  fiscal  year  increase  its  capital  to  such  an  amount  that  the 
average  deposits  of  the  preceding  year  shall  not  exceed  ten  times  its  capital, 
or  else  reduce  its  deposits  so  that  they  will  not  exceed  ten  times  its  capital. 

Sec.  12.  After  a  receiver  has  been  appointed  for  a  failed  bank,  and  has 
been  in  the  discharge  of  his  duties  for  thirty  days,  such  receiver  shall  make 
and  transmit  to  the  Comptroller  of  the  Currency  a  statement  showing  the 
deposit  liabilities  of  such  failed  bank,  the  assets  thereof  as  he  may  be  able  to 
determine,  and  the  assets  then  available  for  the  payment  of  the  first  dividend 
to  depositors;  and  if  the  amount  so  available  shall  not  be  sufficient  to  pay 
a  dividend  equal  to,  or  greater  than,  90  per  cent,  of  the  total  deposits  of 
such  failed  bank,  then  the  Comptroller  of  Currency  shall  transmit  to  said 
receiver  such  amounts  from  the  Premium  Fund  as  shall  enable  said  receiver 
to  pay  forthwith  each  depositor  on  proved  claims  a  dividend  of  90  per  cent, 
of   his   claim. 

In  case  the  Premium  Fund  shall  be  insufficient,  then  the  Reserve  Fund 
shall  be  drawn  upon  for  the  amount  required  to  pay  all  depositors  90  per 
cent,   of  their  claims,  and  said   Reserve  Fund  shall   be   reimbursed   therefor 


158  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

as  soon  as  the  Premium  Fund  shall  have  accumulated  a  surplus  beyond  its 
needs.  All  the  amounts  so  advanced  by  the  Comptroller  of  the  Currency  to 
the  receiver  shall  remain  a  first  lien  on  the  remaining  assets  of  said  failed 
national  bank  in  favor  of  said  Depositors'  Insurance  Department.  The 
receiver  shall  from  time  to  time  transmit  to  the  Comptroller  of  the  Currency 
all  the  proceeds  which  may  be  derived  from  the  remaining  assets  up  to  the 
amount  so  advanced,  and  all  such  sums  so  transmitted  shall  be  credited  to 
the  funds  taken  from.  The  remaining  assets  of  such  failed  national  banks 
after  such  lien  shall  have  been  satisfied,  if  any  there  may  be,  shall  be  ad- 
ministered by  the  receiver  for  the  benefit  of  the  creditors  thereof. 

Sec.  13.  Any  national  bank  which  shall  go  out  of  business,  and  which 
shall  have  paid  its  depositors  in  full,  shall  receive  from  the  Comptroller  of 
the  Currency  such  an  amount  as  shall  stand  to  its  credit  after  having  charged 
against  it  all  its  proportionate  share  of  losses  sustained  in  the  Depositors' 
Insurance  Department,  up  to  the  time  of  its  retirement. 

A  bank's  proportionate  share  of  loss  shall  be  such  part  of  the  losses 
sustained  as  its  average  deposits  may  have  borne  to  the  aggregate  deposits 
in  all  banks  for  the  same  period,  and  as  reported  to  the  Comptroller  of  the 
Currency. 

Sec.  14.  Deposits,  within  the  meaning  of  this  act,  shall  be  construed  to 
mean  all  liabilities  of  a  bank,  excepting  capital,  surplus,  undivided  profits, 
unpaid  dividends,  circulation  of  said  bank,  and  United  States  deposits. 

Sec.  15.  The  average  deposits  of  a  bank  shall  be  ascertained  by  adding 
together  the  total  deposits  as  stated  in  the  several  reports  of  that  bank  sub- 
mitted to  the  Comptroller  of  the  Currency,  and  dividing  the  sum-total  by  the 
number  of  reports  so  made,  or,  if  for  shorter  periods,  then  by  the  number 
of  days. 

Sec.  16.  A  fiscal  year  within  the  meaning  of  this  act  shall  be  construed 
to  mean  an  entire  year  from  and  after  this  act  takes  effect  and  each  entire 
year  thereafter. 

Sec.  17.  Section  5137  of  the  Revised  Statutes  of  the  United  States  is 
hereby  amended  by  inserting,  after  subdivision  fourth  of  the  said  section,  a 
subdivision  thereof  as  follows : 

"Fifth.  A  national  banking  association  shall  be  authorized  to  loan  moneys 
on  real-estate  mortgages  under  the  following  restrictions  and  conditions: 
Such  loans  shall  not  exceed  20  per  cent,  of  its  total  loans,  and  of  such  amount 
not  to  exceed  one-fifth  shall  be  on  manufacturing  plants.  The  loans  on  any 
manufacturing  plant  shall  not  exceed  one-fifth  of  the  entire  actual  value  there- 
of and  on  all  other  real  estate  the  loan  shall  not  exceed  two-thirds  of  the 
actual  value  thereof." 

No  bank  shall  make  any  loan  upon  real  estate  until  the  application  therefor 
shall  have  been  submitted  to  and  approved  by  the  board  of  directors. 

Sec.  18.  Section  5139  of  the  Revised  Statutes  of  the  United  States  is 
hereby  amended  by  adding  after  the  words  "United  States  Registered 
Bonds,"  in  the  first  paragraph  thereof,  the  words,  "or  bonds  of  any  state, 
county,  or  incorporated  city  of  the  United  States,  which  bonds  are  of  a 
character  as  described  in  Section  3  and  approved  by  the  Secretary  of  the 
Treasury;  provided  that  such  bonds  so  deposited  shall  not  exceed  25  per 
cent,  of  the  total  amount  required  by  this  section  to  be  deposited." 


BANKING  REFORM  AND  CURRENCY  SECTION  159 

Sec.  19.  Section  5200  of  the  Revised  Statutes  of  the  United  States  is 
hereby  amended  by  adding  at  the  end  thereof  the  following: 

"Provided,  however,  that  any  bank  whose  total  assets  exceeds  five  times 
its  capital  may  loan  to  any  one  person,  company,  corporation,  association,  or 
firm  an  amount  which  shall  not  exceed  2  per  cent,  of  the  total  assets  of  such 
bank;  and  provided  further  that  such  loans  in  excess  of  ten  times  its  capital 
shall  be  at  all  times  protected  by  collateral  security  equal  to  or  greater  in 
value  than  such  loans." 

Sec.  20.  Alf  acts  or  parts  of  acts  inconsistent  with  this  are  hereby 
repealed,  and  nothing  herein  contained  shall  affect  existing  rights  of  banks 
which  have  failed  prior  to  the  time  this  act  shall  take  effect. 

It  is  assumed  that,  if  such  an  act  should  ever  pass,  it  would 
not  take  effect  until  at  least  three  months  after  its  passage. 

Assuming  that  such  an  act  were  in  operation  at  this  date,  the 
reserve  fund  on  the  present  national  bank  deposits  of  about  $4,500,- 
000,000,  at  1  per  cent.,  would  be  $45,000,000 — a  capital  which 
would  inspire  the  greatest  confidence.  But  as  we  must  expect  a 
large  increase  of  national  banks,  these  funds  would  soon  be  twice 
this  amount,  and  the  presumption  is  that  the  premium  dues  could 
later  on  be  reduced. 

It  is  self-evident  that  as  soon  as  a  depositors'  insurance  plan 
becomes  operative  practically  every  bank  receiving  deposits  other 
than  national  banks  must  reorganize  as  a  national  bank,  which 
would  improve  our  whole  financial  system.  As  there  is  nothing 
which  will  prevent  any  savings,  state  or  private  bank  from  national- 
izing, provided  always  that  real-estate  mortgage  loans  will  be  per- 
mitted to  be  made,  there  will  be  no  hardship  in  such  connection. 

Only  90  per  cent,  insurance  is  provided  for,  because  there  are 
some  objections  to  full  insurance,  since  the  weaker  banks  would 
stand  on  a  level,  as  regards  credits,  with  the  strongest  bank.  It 
is  but  fair  that  a  strong  bank  in  high  standing,  with  conservative, 
honest  management,  should  be  appreciated,  and  that  a  banker  should 
be  encouraged  to  try  for  higher  ideals.  By  a  90  per  cent,  insur- 
ance a  depositor  would  still  be  sufficiently  interested  to  exercise 
some  caution  in  selecting  a  bank  of  the  highest  credit,  while  at 
the  same  time  the  10  per  cent,  at  his  own  risk  would  not  be  sufficient 
to  worry  him  greatly  in  a  panic,  as  is  the  case  under  the  present 
condition,  when  in  a  bank  panic  depositors  arc  at  once  possessed 
of  a  fear  that  everything  is  lost. 

Section  2  provides  that  the  net  profit  on  circulation  should  go 


l6o    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

into  the  premium  fund.  This  profit  is  estimated  to  have  been  for 
the  forty  years  about  $73,000,000,  and  would  alone  have  paid  all 
losses  to  depositors  in  failed  national  banks  up  to  date,  with  over 
$30,000,000  remaining.  Owing  to  the  reduced  tax  on  circulation, 
the  net  profit  last  year  was  about  $1,000,000,  and  the  indications 
are  that  the  surplus  revenue  from  this  source  alone  would  be 
sufficient  to  make  up  the  deficits  of  failed  national  banks,  so  that  all 
creditors  could  be  paid  90  per  cent,  on  their  claims.  It  would 
seem  that  the  net  profit  on  circulation  derived  from  the  banks, 
especially  when  it  is  to  be  used  for  such  a  beneficent  end,  should 
not  be  appropriated  for  any  other  purpose. 

Section  11,  restricting  the  deposits  to  ten  times  the  capital,  is 
for  the  reason  that  in  some  banks  deposits  far  exceed  this.  The 
ratio  of  deposits  to  capital  has  increased  from  year  to  year,  till  it 
now  amounts  on  the  average  to  about  $5  of  deposits  to  $1  of  capi- 
tal, and  in  such  cases  on  a  $100  of  deposits  a  bank  would  have 
$20  of  its  own  capital  behind  it,  and,  with  the  shareholders'  liabili- 
ties, $40.  Now  take  a  bank  which  has  $20  of  deposits  to  $1  of 
capital ;  such  a  bank  on  a  $100  of  deposits  would  have  only  $5  of 
capital  behind  it,  and  with  the  shareholders'  liabilities  $10;  conse- 
quently the  latter  would  not  be  nearly  so  safe  as  the  former. 

Nearly  all  banks  which  have  ten  times  more  deposits  than 
capital  have  sufficient  surplus,  if  it  were  converted  into  capital,  to 
bring  the  deposit  below  the  ten-time  limit;  and  under  such  an 
arrangement  it  would  be  safer,  because  capital  cannot  be  diverted 
to  other  purposes,  as  surplus  funds  can.  And,  besides  this,  the 
double  liability  of  the  shareholders  would  add  to  the  resources  of 
a  failed  bank.  Everything  being  equal,  a  bank's  deposits  loses  in 
safety  the  more  they  exceed  the  capital. 

Section  17  authorizes  a  national  bank  to  loan  on  real-estate 
mortgages  not  to  exceed  20  per  cent,  of  its  total  loans.  These 
loans,  experience  has  proved,  are  the  safest,  especially  to  a  country 
banker.  They  offer  a  bank  a  larger  field  to  select  its  loan  from, 
and  thereby  enable  it  to  reject  a  questionable  discount,  which,  if  it 
were  confined  to  these  alone,  in  order  to  keep  its  funds  employed, 
it  would  be  tempted  to  accept.  It  seems  ridiculous  to  allow  a 
bank  to  loan  on  a  bare  note,  and  then  prohibit  it  from  securing  such 
note  by  a  real-estate  mortgage.     Good  real-estate  mortgages,  even 


BANKING  REFORM  AND  CURRENCY  SECTION  161 

if  not  due,  are  a  quicker  asset  in  a  financial  panic,  when  safety  is 
the  main  question,  than  a  note  or  discount,  even  if  due,  as  at  such 
times  a  banker  in  most  cases  does  not  expect  payment,  but  only 
extension  or  renewal.  I  never  lost  a  dollar  on  a  real-estate  mort- 
gage, and  in  the  panic  of  1893  they  proved  to  be  the  best  asset  of 
the  banks  on  which  cash  could  be  realized.  A  bank  examiner  can 
also  determine  the  value  of  a  bank's  mortgage  loans  by  the  records 
better  than  the  value  of  its  unsecured  loans  and  discounts.  The 
more  secured  loans  a  bank  has,  the  safer  it  is.  This  section  is  the 
most  important  of  the  whole  act,  as  without  it  many  banks  could 
not  enter  into  the  national  system,  which  would  defeat  the  purpose 
of  this  act. 

Section  18  provides  that  25  per  cent,  of  state,  county,  or  city 
bonds  may  be  deposited  against  circulation,  instead  of  United  States 
bonds  exclusively.  These  bonds  are  practically  as  safe  as  govern- 
ment bonds.  All  saving  banks,  loan,  trust  and  insurance  com- 
panies have  taken  these  for  years  with  hardly  any  loss,  and  they 
have  not  all  been  safeguarded  as  herein  provided.  If  the  time  ever 
should  come  when  our  government  debt  is  so  reduced  that  the 
outstanding  United  States  bonds  will  not  supply  the  security  re- 
quired against  circulating  notes,  then  the  25  per  cent,  municipal 
bonds  above  provided  for  could  from  time  to  time  be  increased, 
and  thereby  our  secured  currency  perpetuated. 

Section  19  increases  the  amount  of  a  single  loan  over  one-tenth 
of  a  bank's  capital,  as  soon  as  a  bank's  assets  exceed  five  times  its 
capital.  The  present  restriction  is  not  based  on  a  correct  principle, 
and  is  so  frequently  disregarded  that  it  would  be  far  better  to 
increase  such  loans.  A  similar  amendment  has  several  times  been 
recommended  by  ex-Comptroller  Charles  G.  Dawes. 

The  reason  why  I  take  such  an  interest  in  insuring  depositors 
in  banks  is  perhaps  the  many  bank  failures  in  my  county,  through 
which  I  could  not  fail  to  observe  the  suffering  and  worry  and 
anxiety  of  the  people  over  the  safety  of  their  money.  In  1855  the 
first  bank  was  organized  in  my  city.  It  failed  soon  after.  From 
time  to  time  five  more  banks  were  organized,  and  all  but  one  failed 
at  different  times,  till  in  1893  all  had  failed  in  our  city  and  county 
but  one.  A  banker  came  to  be  regarded  as  about  the  worst  rascal 
in  our  community.  I  remember  that  in  1893  my  best  friends 
11 


l6j    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

avoided  being  seen  in  my  company  for  fear  they  might  be  judged  by 
the  company  (hey  kept,  although  I  was  not  involved  in  any  bank 
failure.  But  this  made  no  difference.  The  innocent  had  to  suffer 
with  the  guilty,  and  so  I  bore  it  philosophically  as  a  martyr. 

The  generally  entertained  suspicion  that  most  bank  failures 
have  been  caused  by  fraud  is  quite  erroneous.  During  my  banking 
experience  I  have  found  that,  with  but  few  exceptions,  bankers  have 
all  striven  to  act  most  honorably ;  but  somehow  they  fail  to  realize 
the  continuous  vigilance  and  prudence  required  in  investing  safety 
and  profitably  other  people's  money,  being  often  tempted  to  invest 
in  venturesome  undertakings  promising  large  returns,  but  in  most 
cases  turning  out  disastrously.  Very  rarely  a  banker  fails  with 
the  intention  of  profiting  thereby,  and  I  do  not  believe  there  is  one 
in  a  thousand  failures  which  can  be  attributed  to  such  a  cause. 

The  exceptionally  numerous  bank  failures  in  my  county  are  not 
a  criterion  to  be  applied  to  our  whole  country ;  but  I  feel  quite 
certain  that  of  all  the  money  in  our  county  there  is  at  least  20 
per  cent,  hoarded,  while  80  per  cent,  is  deposited  in  banks ;  and 
we  may  safely  estimate  that  it  will  not  be  far  from  10  per  cent,  in 
our  whole  country,  which  would  be  in  banks  if  they  were  insured. 

But  I  do  not  advocate  the  insurance  plan  for  the  purpose  of 
getting  a  material  benefit  out  of  the  money  now  hoarded;  for  if  the 
objection  advanced  against  this  plan  should  prove  true — namely, 
that  the  stronger  and  more  reputable  banks  would  lose  by  it — then 
the  bank  I  represent  would  surely  share  in  such  loss.  I  am  actu- 
ated solely  by  a  confident  belief  that  in  the  near  future  the  de- 
posits in  banks  will  be  insured,  either  by  corporation  or  by  means  of 
postal  savings  banks,  which  would  be  a  great  detriment  to  all  banks. 
I  also  believe  that  it  would  be  of  incalculable  benefit  to  the  whole 
people,  of  which  I  am  a  part,  and  I  do  not  fear  that  I  shall  not 
get  my  share  of  its  accruing  benefits.  That  the  people  will  welcome 
with  unanimity  the  advent  of  any  measure  which  will  lessen  the 
worst  mental  agony  they  have  to  suffer  will  not  be  questioned. 

The  ample  time  given  before  the  next  session  of  Congress  will 
enable  all  interested  to  investigate  the  proposed  plan  most  thorough- 
ly, and  determine  and  discuss  its  merits.  If  the  bankers  could  give 
this  plan  their  approval,  there  would  be  nothing  in  the  way  of  a 
speedy  enactment  of  a  law  by  which  the  insurance  of  deposits  could 
be  made  an  accomplished  fact. 


BANKING  REFORM  AND  CURRENCY  SECTION  163 

PANIC  PANACEAS 

ADDRESS  DELIVERED  BY  ANDREW  JAY  FRAME,  PRESIDENT  OF  THE  WAUKESHA  NA- 
TIONAL BANK,  WAUKESHA,  WIS.,  BEFORE  THE  AMERICAN  BANKERS'  ASSOCIA- 
TION,   AT    NEW    YORK    CITY,    SEPTEMBER,     IOU4. 

Our  battle  for  the  world's  standard  of  value  has  been  practi- 
cally won.  Now  the  paramount  economic  question  before  the 
American  people  is :  How  can  we  minimize  conditions  which  pro- 
duce panics,  and  also  ameliorate  their  after  paralyzing  effects? 

Panics  undoubtedly  cannot  be  prevented,  because  it  is  impossible 
to  change  human  nature ;  because  nature  is  unlikely  to  be  less 
fickle  in  her  gifts  to  man ;  because  prosperity  and  adversity  follow 
each  other  as  surely  as  the  tide  rises  and  falls;  because,  where  the 
rising  tide  of  prosperity  appears  and  a  few  clear-visioned  Napoleons 
of  finance  make  quick  fortunes,  the  masses  lose  their  conservatism 
and  riotous  speculation  ensues,  resulting  often  in  panic.  Not- 
withstanding this,  I  am  a  firm  believer  in  ameliorating  panic  con- 
ditions, both  as  to  their  frequency  and  their  severity.  But  how? 
My  answer  is : 

1.  By  studying  history  and  profiting  by  the  experiences  of 
the  past. 

2.  By  passing  conservative  and  sound  banking  laws,  and 
then  enforcing  them. 

3.  By  providing  cash  on  sound  lines  to  meet  extraordinary 
demands,  and  immediately  retiring  it  as  soon  as  the  pressure  for 
funds  is  over,  to  prevent  inflation,  and  also  to  be  ready  for  the 
next  emergency. 

The  Standard  Dictionary  epitomizes  conditions  leading  to 
panics  as  follows:  "An  undue  expansion  of  loans  (by  banks), 
an  unsound  standard  of  value,  over-extension  of  mercantile  credits, 
and  widespread  speculation  are  forerunners  of  panics."  Let 
us  never  forget  that  confidence  upbuilds  and  distrust  paralyzes. 
The  blighting  effect  of  distrust  in  our  standard  of  value  which 
was  the  main  underlying  cause  of  the  panics  of  1873  and  1893 
has  given  to  our  people  convincing  object-lessons,  more  potent 
than  pages  of  logic,  that  a  100-cent  dollar  is  indispensable  to 
stability  and  prosperity.  Populists  alone  dissent.  They  attempt 
to  live  by  their  wits,  and  generally  fail  for  lack  of  capital.  I-O-U's 
are  not  capital.     With  these  calamitous   conditions   vividly  before 


t64    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

us,  the  result  has  been  a  campaign  of  education  and  legislation 
which  has  practically  eliminated  from  further  discussion  the  "un- 
sound standard  of  value."  Absolutely  to  eliminate  all  distrust, 
the  language  of  our  statutes  should  be  so  unequivocal,  as  to  the 
redemption  of  our  vast  volume  of  silver  coins  in  gold  on  demand, 
that  no  man  would  dare  disobey  its  mandates. 

In  the  limelight  of  historic  facts,  in  proof  of  the  value  of 
good  banking  laws,  let  us  consider  only  the  brief  period  of  the 
past  forty  years.  Permit  me  to  refer  to  the  report  of  the  Comp- 
troller of  the  Currency  for  1896,  on  pages  33,  34,  and  54,  as  to 
the  failures  of  banks.  These  pages  do  not  cover  yearly  nor  local 
history,  but  United  States  history  as  to  national  and  state  banks 
for  the  long  period  from  1863  to  1896.  In  that  period  330 
national  and  1,234  state  banks  failed.  During  this  same  period 
the  claims  filed,  dividends  and  percentage  paid  to  depositors,  and 
amounts  still  unpaid   were  as  follows : 


National  Banks. 
State  Banks 


Claims  Filed 


$  98,322,170 
220,629,988 


Percentage 
Dividends  Paid 


63  A 

45  tV 


Still  Due  ot 
Creditors 


$  35,556,026 
120,541,262 


Please  note  that  further  dividends  have  since  been  paid,  as  the 
later  failures  were  not  entirely  closed. 

Permit  a  further  reference  to  a  most  excellent  address  along 
the  same  lines,  which  all  seeking  light  should  read,  delivered  by 
Comptroller  Ridgely  last  April  before  the  Society  of  Political  and 
Social  Science  at  Philadelphia,  entitled  "Government  Control  of 
Banks  and  Trust  Companies."  The  Comptroller  says,  in  refer- 
ring to  this  same  report  as  "the  last  date  to  which  complete  figures 
are  available" : 

It  will  be  seen  that,  while  only  6.5  per  cent,  of  the  number  of  national 
banks  in  existence  failed  during  this  time,  17.6  per  cent  of  the  other  banks 
in  existence  failed.  And  while  the  national  banks  which  had  failed  up  to 
1896    (and   were   entirely    closed)    paid    to    their   creditors    75    per   cent,    in 

dividends,  the  state  and  other  banks  paid  only  45  per  cent The  total 

loss  to  depositors  in  forty-one  years  has  been  less  than  thirty  million  dollars. 

This  estimate  doubtless  is  intended  to  cover  the  net  losses  when  all 
the  affairs  of  failed  national  banks  to  this  date  are  entirely  closed. 


BANKING  REFORM  AND  CURRENCY  SECTION  165 

By  way  of  digression,  when  this  result  is  compared  with  the 
deficiency  of  thirty-five  millions  of  dollars  resulting  from  the 
failure  of  the  City  of  Glasgow  Bank,  with  its  131  branches  in  1878, 
our  national  banking  system  looms  up  so  grandly  that  every 
American  citizen  has  reason  to  be  proud. 

On  the  other  hand,  something  must  have  been  radically  wrong 
in  at  least  some  of  our  state  banking  systems  when  we  compare 
the  number  of  failures,  amount  of  losses,  and  percentage  paid  to 
depositors,  as  shown  in  the  above  table. 

Does  any  doubt  that  these  widely  divergent  results  were  brought 
about  by  an  enforced  conservatism  under  the  National  Bank  Act, 
as  against  good  banking  laws  in  a  few  states,  lax  laws  in 
some  states,  and  no  laws  in  many  others?  It  is  cause  for 
congratulation  that  the  states  are  awaking,  although  too  slowly,  to 
the  necessity  for  better  conditions.  A  few  years  ago  the  Wiscon- 
sin Legislature  passed  a  good  state  banking  law,  and  the  people 
vetoed  it.  She  later  redeemed  herself.  May  the  good  people  of 
Ohio  redeem  themselves  from  a  like  folly  committed  last  fall! 
With  ten  thousand  millions  of  dollars  of  deposits  in  the  banks  and 
trust  companies  of  the  United  States  due  to  not  less  than  fifteen 
millions  of  depositors,  in  order  that  conditions  leading  to  panics 
and  their  paralyzing  effects  may  be  minimized,  is  it  not  the  clear 
duty  of  our  statesmen  to  perfect,  as  far  as  possible,  conservative 
laws  along  sound  lines?  I  will  suggest  but  a  few  of  the  salient 
features. 

1.  No  bank  of  any  kind  should  be  allowed  to  open  without 
ample  paid-in  capital  as  a  guarantee  fund,  before  the  innocent  de- 
positors intrust  their  funds  with  it.  History  teems  with  trouble 
resulting  from  wild-cat  banking.  Possibly  mutual  savings  banks, 
which  ought  to  accumulate  a  surplus,  might  be  excepted. 

2.  A  limitation  on  loans  to  a  certain  percentage  of  capital — to 
which  I  will  add,  surplus  (which  is  not  included  in  the  National 
Currency  Act) — to  any  one  individual,  firm,  or  corporation. 

3.  Requirements  of  reserves  against  demand  liabilities.  The 
cash  reserves  can  consistently  be  lowest  with  the  savings  banks  and 
trust  companies,  because  their  deposits  arc  largely  subject  to  time 
notice  before  payment.  That  time  limit  in  times  of  trouble  should 
be  rigidly  enforced,  as  it  was  lately  in  St.  Louis,  where  a  foolish 


,  i ,     PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

panic  was  undoubtedly  prevented  by  prompt  action  in  this  respect. 
The  limitation  for  commercial  banks,  as  laid  down  in  the  National 
Currency  Act,  is  eminently  sound  and  inspires  conservative  manage- 
ment. Although  the  rule  is  often  broken  in  times  of  crises,  I 
think  no  bank  that  was  solvent  has  ever  been  closed  by  the  Comp- 
troller for  that  cause.  Reason  reigns  at  such  times  and  not  the 
rigid  letter  of  the  law.  Some  fifteen  or  twenty  years  ago  I  said 
to  Lyman  J.  Gage,  then  president  of  the  First  National  Bank  of 
Chicago :  "You  keep  a  generous  reserve  of  cash  on  hand."  His 
answer  came  quickly :  "I  should  not  sleep  nights  with  less  than  40 
per  cent."  This  lusty  child  seems  to  keep  on  growing  while  others 
have  fallen  by  the  wayside.  Let  history  speak  as  to  who  survives 
longest,  the  conservative  or  the  plunger. 

4.  The  rate  of  interest  paid  to  depositors  must  be  left  to  the 
individual  bank  and  cannot  be  regulated  by  law.  It  is  just  cause 
of  some  concern  now  that  fierce  competition  in  several  quarters 
in  this  respect  is  likely  to  produce  unpleasant  results.  Thrice  with- 
in my  forty-two  years  of  banking  experience,  banks  in  a  certain  city 
mailed  broadcast  offers  to  pay  interest  on  account  in  excess  of  the 
current  legitimate  rate  paid  by  other  banks.  Depositors  that  took 
the  bait,  within  a  year  thereafter,  got  bitten  by  failure  of  every  one 
of  those  three  banks.  Moral :  Avoid  banks  paying  more  than 
normal  rates  of  interest,  as  the  probabilities  are  "there  is  something 
rotten  in  Denmark."  This  moral  will  apply  to  individual  deposi- 
tors as  well  as  to  banks  with  banks. 

5.  The  question  of  value  of  supervision  of  banks  is  simply  be- 
yond controversy  as  to  beneficial  results,  and  I  will  therefore  pass 
it.  If  experience  proves  there  is  such  a  marked  contrast  in  favor 
of  safety  to  depositors  in  national  banks,  which  are  under  careful 
laws  and  supervision,  as  against  all  other  banks,  which  are  only 
partially  so,  is  it  not  a  reasonable  and  sound  conclusion  that  the 
meat  of  the  whole  matter  lies  in  making  good  banking  laws,  then 
enforcing  them  by  strict  examinations,  closing  up  the  insolvents, 
and  not  allowing  them  to  dissipate  good  assets  for  years  after  in- 
solvency, as  has  been  the  case  all  over  our  country  ?  Limit  failures, 
and  panic  conditions  will  be  ameliorated.  Good  banks  ought  to 
court  investigation,  and  the  people  should  insist  on  rigid  investiga- 
tion of  all  banks  to  weed  out  insolvents.     Let  us  give  to  the  fifteen 


BANKING  REFORM  AND  CURRENCY  SECTION  167 

millions  of  thrifty  people  of  the  land  who  intrust  ten  thousand 
million  dollars  of  their  hard  earnings  to  our  care  all  that  protective, 
wholesome  laws  can  give,  thus  broadening  confidence,  and  failures 
will  be  less  calamitous. 

The  savings  banks  and  trust  companies  each  have  their  legiti- 
mate sphere  and  should  be  regulated  on  conservative  lines,  accord- 
ing to  their  methods  of  doing  business.  Less  reserves  are  required, 
as  they  have  less  demand  liabilities,  and  many  of  their  loans  are  of 
a  different  character  from  those  of  a  strictly  commercial  bank.  All 
banks  doing  a  commercial  business,  and  to  the  extent  of  their 
demand  liabilities,  should  be  governed  somewhat  on  the  lines  of  the 
National  Currency  Act — the  safest  bank  act  ever  devised  by  man. 
Comptroller  K'dgely  asserts  that  the  national  system  has  "an  un- 
equaled  record  of  soundness  and  safety."  A  careful  examination 
of  the  world's  history  conclusively  proves  his  statement.  We  must 
not  forget  that  Old  World  banking  is  subject  to  practically  no 
supervision  or  regulation  comparable  with  the  National  Currency 
Act. 

Nevertheless,  in  view  of  the  fact  that  national  banks  are  not 
increasing  in  the  same  proportion  as  other  banks — due,  doubtless,  as 
stated  by  the  Comptroller,  to  the  desire  "for  greater  freedom  from 
control,  weaker  reserves,  and  less  careful  management" — there  is 
no  doubt  that  many  national  bankers  are  chafing  under  some  of  the 
rigid  rules  of  the  act,  especially  limiting  to  10  per  cent,  of  capital, 
loans  on  public  market  cash  collaterals,  and  in  country  towns,  where 
commercial  paper  is  scarce,  to  a  limited  amount  of  loans  on 
mortgage.  Perfection  is  impossible  of  attainment.  Reason  alone 
should  reign,  and  if  the  lines  of  regulation  are  drawn  more  closely, 
I  fear  the  downfall  of  the  system  will  take  place.  In  the  interest  of 
the  great  public  benefits  at  stake,  may  not  over-rigid  regulations 
destroy  this  most  beneficent  act? 

When  panic  threatens,  the  profoundest  problem  is:  How  can 
it  be  prevented  or  ameliorated  so  that  banks  can  promptly  respond 
to  the  insane  demands  of  the  frightened  depositors  for  cash,  and 
how  can  the  banks  be  put  in  condition  to  discount  freely  to  all  sol- 
vent parties,  in  order  to  prevent  the  paralyzing  effects  of  the  col- 
lapse of  trade  and  industry  in  all  branches,  which  is  inevitable  when 
forced  liquidation  takes  place,  and  which  is  so  destructive  to  labor 


168  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

and  capital  alike,  in  substituting  sonp-lionses  and  tramps  where  the 
hum  of  buyers  and  sellers  ought  to  be  uppermost?  Political  econo- 
mists in  all  ages  have  wrestled  with  this  knotty  problem  with  in- 
different results. 

Professor  Sumner,  in  his  condensation  of  the  celebrated  "Bul- 
lion Report  of  1810"  to  the  House  of  Commons,  says:  "In  the 
presence  of  a  panic  the  duty  of  the  bank  is  to  discount  freely  to 
all  solvent  parties."  And  although  Sumner  says,  "Its  doctrines 
are  the  alphabet  of  modern  finance.  They  are  no  longer  disput- 
able," yet  no  provision  by  law  was  then  nor  since  made  to  provide 
cash  to  pay  frightened  depositors  and  to  discount  freely  to  all  sol- 
vent parties. 

The  banks  of  Great  Britain  in  1844  were  res«  icted  on  issues 
of  bank-notes  to  the  amount  then  outstanding  by  the  banks  then 
existing.  Seventy  per  cent,  of  the  right  of  issue  of  those  banks 
which  have  closed  since  1844  nas  reverted  to  the  Bank  of  England, 
thus  reducing  the  total  uncovered  issues  allowed  to  banks  in  gen- 
eral, all  of  which  are  subject  to  the  Unlimited  Liability  Act  as  to 
note  issues,  to  the  small  sum  of  approximately  £8,000,000,  and  has 
increased  the  issues  of  the  Banks  of  England  since  1844  from 
£14,000,000  to  about  £18,500,000,  based  on  securities.  All  other 
issues  of  the  bank  are  covered  with  gold  coin  or  bullion,  thus 
making  the  notes  practically  a  gold  certificate  and  giving  the  Bank 
of  England  the  sole  right  of  issue  in  Britain.  As  extraordinary 
troubles  require  extraordinary  remedies,  in  order  to  ameliorate 
some  of  the  calamitous  panic  conditions  which  have  overtaken 
Britain,  history  says  that  the  Bank  of  England  in  1847,  I857,  and 
1866,  after  the  panics  had  paralyzed  its  progress,  on  the  assurance 
of  the  government  officials  that  no  prosecution  would  follow,  sus- 
pended the  Bank  Act  as  to  issuing  notes  only  on  the  deposit  of  a 
like  amount  of  coin  or  bullion,  and  issued  notes  to  the  banking 
department  on  deposit  by  it  with  the  issue  department  of  ample 
securities.  This  was  an  unlawful  act,  giving  elasticity  to  the  cur- 
rency, but  it  placed  the  banking  department  in  an  easy  condition 
to  "discount  freely  to  all  solvent  parties."  Again  in  1838  the  bank 
borrowed  £2,500,000  from  the  Bank  of  France  during  panic  con- 
ditions, and  in  1890,  during  the  Baring  troubles,  she  borrowed 
£3,000,000  more;  also    £2,000,000    from    other   sources;   and   the 


BANKING  REFORM  AND  CURRENCY  SECTION  169 

panics  were  stayed.  The  apparent  necessity  for  these  extraordi- 
nary acts  was  that  the  country  had  reached  a  commercial  crisis  where 
good  securities  could  not  be  sold  for  cash.  Suspension  and  con- 
sequent ruin  were  staring  sound  commercial  houses  and  banks  in 
the  face. 

In  each  case  the  action  of  the  bank  afforded  instant  relief,  and 
doubtless  saved  hundreds  of  millions  of  dollars  to  tottering  houses 
unable  to  meet  payments  except  for  such  relief.  As  soon  as  the 
pressure  was  over,  the  illegal  issues  were  retired. 

As  history  shows  conclusively  that  financial  revulsions  in  Great 
Britain  in  the  past  sixty  years  have  been  more  calamitous  than  those 
of  our  own  country,  thus  disproving  the  claims  of  the  advocates  of 
branch  banking  and  asset  currency  that  they  are  a  panacea  for 
panics,  and  as  the  commercial  banks  of  Britain  carry  about  one-half 
as  much  reserve  against  general  liabilities  as  ours,  are  we  not  justi- 
fied in  concluding  that  an  insufficient  reserve  is  at  least  one  of  the 
underlying  causes  of  their  troubles?  If  so,  we  can  consistently  join 
in  the  just  criticism  of  the  London  Economist  in  asserting  that 
Great  Britain's  4  per  cent,  of  coin  reserve,  against  the  £825,000,- 
000  of  liabilities  to  the  public  of  her  banks,  is  clearly  the  cause  of 
the  sensitiveness  of  her  money  market.  The  Economist  advocates 
a  reform  of  Peel's  act  of  1844,  advises  larger  reserves  to  preserve 
confidence,  which  has  so  often  been  rudely  shaken  and  which  is 
necessary  to  all  progress  and  stability,  and  says  that  probably  noth- 
ing short  of  a  cataclysm  will  demonstrate  the  necessity  for  such 
change.  Britain's  proverbial  lethargy  in  this  respect  is  paralleled 
by  her  tenacity  in  holding  to  her  antiquated  railway  cars  and  her 
abominable  pounds,  shillings,  and  pence.  Should  Britain  provide 
for  larger  reserves,  which  are  about  half  of  ours,  and  legally 
empower  the  Bank  of  England  to  relieve  extraordinary  pressure 
on  the  same  lines  as  in  1847,  1857,  and  1866,  before  paralysis  takes 
place,  she  doubtless  would  minimize  serious  panic  conditions,  as 
far  as  it  is  possible  to  do  so. 

The  Bank  of  France  has  had  the  sole  right  of  issue  in  France 
since  1848,  and  to-day  has  the  right  to  issue  $1,000,000,000  of 
notes,  and  is  not  restricted  to  the  holding  of  coin  or  government 
securities  for  every  dollar  of  notes  issued,  but  voluntarily,  in  re- 
spect to  reserves  against  note  issues,  follows  nearly  the  same  line 


i70  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

;:s  does  the  Bank  of  England.  Its  coin  reserves  have  approximated 
85  per  cent,  of  about  $800,000,000  average  note  issues  for  some 
years  past.  Under  very  conservative  management,  the  right  of 
issue  has  been  so  carefully  guarded  that  France,  although  subject 
to  financial  revulsions,  has  doubtless  escaped  serious  trouble  at 
times.  We  must  not  forget  that  the  Bank  of  France  is  more  a 
bank  of  issue  than  a  bank  of  deposit,  as  its  deposits  are  exceeded 
to-day  by  both  the  National  City  Bank  and  the  National  Bank  of 
Commerce  of  this  city,  while  the  First  National  Bank  is  a  close 
third.  New  York  City  is  certainly  forging  rapidly  upward  as  the 
world's   financial   metropolis. 

With  the  exception  of  only  five  banks,  which  are  allowed  to 
issue  eighteen  millions  of  dollars  of  uncovered  notes,  the  Imperial 
Bank  of  Germany  monopolizes  that  right.  The  bank  is  allowed  to 
issue  now  about  $100,000,000  uncovered  circulation  under  certain 
restrictions.  Any  excess  over  that  sum  must  pay  5  per  cent,  in- 
terest per  annum  to  the  government  for  the  right.  This  excess 
issue  is  the  only  true  means  of  obtaining  relief  under  panic  con- 
ditions, as  the  interest  rate  will  certainly  retire  the  redundant  cur- 
rency as  soon  as  the  pressure  for  funds  is  over,  thus  preventing 
inflation,  which  must  be  guarded  against  as  one  would  guard 
against  an  insidious  disease. 

If  we  add  to  the  foregoing  Austria,  Belgium,  Netherlands,  Nor- 
way, Denmark,  and  Russia,  which  have  only  one  bank  of  issue  each, 
and  all  are  under  such  careful  restrictions  as  to  coin  reserves 
against  notes  that  their  combined  uncovered  circulation  approxi- 
mates but  a  little  over  $600,000,000  as  against  nearly  $600,000,000 
uncovered  circulation  in  the  United  States  alone,  we  should  be  im- 
pressed that,  if  we  are  to  be  guided  by  the  experience  of  older 
nations,  we  must  discard  the  thought,  as  they  have  done,  of  the 
right  to  issue  uncovered  notes  except  through  the  great  centralized 
institutions,  and  then  only  as  temporary  relief  measures  and  not 
for  profit.  If  we  except  Britain,  all  the  countries  named  have  pro- 
vided, through  their  great  centralized  banks,  for  currency  issues 
under  careful  restrictions,  which  generally  gives  the  relief  sought 
by  us.  A  circulation  issued  by  banks,  with  material  profit  in  it, 
means  expansion.  If  the  big  and  little  banks  of  this  country  were 
to  throw  out  a  life-line  at  will  to  the  over-buoyant  in  the  shape  of 


BANKING  REFORM  AND  CURRENCY  SECTION  171 

asset  currency,  I  fear  the  plungers  would  be  swimming  beyond 
their  depth  continually;  therefore  some  relief  measure,  under  care- 
ful restrictions  to  prevent  inflation,  should  be  found  for  use  under 
panic  conditions.  If  the  banks  of  Europe  and  three-fourths  of  those 
in  the  United  States  survive  and  prosper  without  circulation,  why 
cannot  the  other  quarter  survive  on  the  same  diet?  The  national 
banks  profited  in  their  early  years  on  circulation  because  bonds 
drew  high  rates  of  interest,  and  thus  they  were  fully  compensated 
for  their  patriotism ;  but  now  the  profit  is  so  slight  that  few  banks 
care  a  continental  whether  they  issue  currency  or  not. 

As  the  quality  of  our  money  is  fixed,  and  under  natural  eco- 
nomic laws  the  quantity  is  ample  for  all  legitimate  requirements; 
as  the  ebb  and  flow  of  gold  from  nation  to  nation,  which  no 
barrier  can  stop,  is  governed  also  by  those  same  natural  laws;  as 
the  fluctuations  in  the  rate  of  interest,  coupled  with  these  natural 
laws,  are  the  proper  barometric  signals  that  ought  to  inspire  con- 
servatism and  check  undue  expansion  of  credit  when  rates  of  in- 
terest are  above  normal,  why  should  we  be  eternally  tinkering  with 
the  quantity  of  money  in  the  country?  Many  good  men  believe 
interest  rates  can  be  equalized  by  currency  issues.  All  history  dis- 
proves the  theory. 

It  is  a  maxim  of  political  economy  that  when  the  quality  is  fixed 
in  rich  countries,  the  needs  of  commerce  will  settle  the  quantity. 
Professor  Jevons  asserts  that  under  such  circumstances  the  last 
thing  a  statesman  should  do  is  to  attempt  to  regulate  the  quantity. 
Therefore,  if  ordinary  occasions  are  provided  for,  the  paramount 
question  is:  How  can  we  provide  cash  to  pay  depositors  and  to 
loan  to  all  solvent  parties  when  panic  threatens,  and  have  that  cash 
return  to  its  reservoir  as  soon  as  the  pressure  is  over,  to  prevent  in- 
flation? 

Shall  we  adopt  the  European  method  and  establish  a  great  cen- 
tral bank  with  conservative  powers,  to  accomplish  the  object 
sought?  Or  shall  we  provide,  through  several  thousand  independ- 
ent national  banks,  for  the  issue  of  credit  currency  as  such  relief 
measure?  The  consensus  of  opinion  seems  to  answer  "No!" 
Personally  T  do  not  see  any  serious  objections  to  a  great  central 
bank  as  fiscal  agent  for  the  United  States  and  as  a  bank  of  the 
banks,  somewhat  on  the  order  of  the  Imperial  Bank  of  Germany,  or 


i;j  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

on  the  order  of  the  Bank  of  England,  but  with  full  power  legally 
to  issue  currency  under  a  5  per  cent,  per  annum  interest  rate  on 
deposit  of  securities,  as  was  done  by  the  Bank  of  England  in  1847, 
1857,  and  1866,  as  an  elastic  or  emergency  measure  to  throttle 
panics  in  their  incipiency.  But  I  suppose  the  banks  holding 
government  deposits  would  object. 

The  nearest  sound  solution  of  the  second  question  comes  from 
our  able  Secretary  of  the  Treasury,  and  also  from  the  committee's 
conservative  report  of  last  year  before  this  convention.  Both  ad- 
vocated the  issue  of  relief  national  bank  notes  in  excess  of  present 
issues,  under  a  5  to  6  per  cent,  interest  penalty  to  insure  its  retire- 
ment after  the  temporary  pressure  for  funds  is  over.  This  tax, 
which  is  the  essence  of  soundness,  in  compelling  the  return  of  the 
extra  issues  back  into  the  reservoir  to  be  ready  to  quench  the  next 
fire  and  also  to  prevent  inflation,  has  been,  to  my  mind  at  least, 
altogether  too  freely  criticised.  I  fear  that  some  critics  have 
allowed  selfishness  as  to  profits  to  outweigh  the  necessity  for  relief. 
Many  good  men  have  declared  they  would  issue  no  currency  and 
pay  5  per  cent,  on  it.  Under  ordinary  conditions,  of  course,  we 
would  not ;  but  under  extraordinary  conditions,  when  frightened 
depositors  are  demanding  cash ;  when  country  bankers  are  neces- 
sarily withdrawing  reserve  balances,  and  solvent  merchants  and 
manufacturers  are  calling  for  loans  to  pay  bills  and  keep  the  wheels 
of  commerce  from  being  stilled,  where  is  the  banker  that  will  not 
temporarily  provide  cash,  if  possible,  at  a  5  per  cent,  interest  rate, 
to  meet  these  demands,  instead  of  slaughtering  sound  securities  in 
markets,  when  at  such  times  even  government  bonds  cannot  be  sold 
for  cash  except  at  ruinous  prices  ?  Let  the  old,  experienced  banker, 
who  has  been  through  this  mill,  answer.  It  seems  to  me  that  we 
all  ought  to  subscribe  to  the  committee's  report,  if  we  could  but 
confine  such  issues  to  the  great,  centralized  banks. 

National  calamities  are  not  born  in  country  towns.  Panics  are 
bred  in  great  cities,  where  colossal  promotions  flourish;  where 
most — not  all — banks  fail  to  reduce  interest-paying  rates  when 
money  is  easy;  where  the  cashier  is  discharged  (according  to 
Secretary  Shaw's  witticism)  when  the  board  of  directors  find  him 
with  $50,000  surplus  reserve ;  where  the  reserves  are  loaned  to  the 
stock  jobbers  that  ought  to  be  held  to  meet  the  call  of  the  country 


BANKING  REFORM  AND  CURRENCY  SECTION  173 

banks  for  their  own  deposits  to  move  the  crops.  Then,  when  the 
stock  jobber  is  called  upon  to  liquidate,  he  must  attempt  to  rob 
Peter  to  pay  Paul;  but,  because  of  the  lack  of  a  proper  cash  re- 
serve generally,  stocks  decline  on  forced  sales  to  obtain  cash,  and 
general  liquidation  takes  place. 

This  fall  doubtless  will  be  an  exception.  Last  year,  in  my 
debate  with  Congressman  Fowler  on  the  asset  currency  question 
before  the  Wisconsin  State  Bankers'  Association,  I  challenged  any 
man  to  prove  that  since  1893  there  had  been  more  than  two  fall 
seasons  when  the  money  market  was  above  a  normal  or  reasonable 
level,  and  then  speculation,  and  not  crop  movements,  was  the  pri- 
mary cause  of  trouble.  The  Wall  Street  Journal,  in  an  able  edi- 
torial, said  my  case  was  won  if  I  could  prove  that  assertion.  I 
reiterate  it.  The  best  condensed  proof  is  in  the  Annual  American 
Encyclopedias  since  1893,  under  the  caption  of  "Financial  Review," 
to  which  reference  is  respectfully  made. 

Conservative  people  in  all  pursuits  do  not  allow  a  little  surplus 
cash  to  burn  their  pockets  when  they  know  extraordinary  payments 
will  soon  require  its  use,  and  bankers  ought  to  be  the  leaders  in  con- 
servatism. If  the  central  cities  are  the  occasional  sinners,  why 
should  they  not  provide  the  occasional  remedy?  Again,  they  are 
far  better  equipped  with  the  right  kind  of  cash  collaterals  on  which 
to  base  these  temporary  issues. 

In  the  consideration  of  this  all-important  question,  permit  four 
suggestions : 

1.  Why  not  empower  the  government  to  issue  but  one  kind  of 
note — to  wit ;  a  legal-tender  note  payable  on  demand  in  gold  coin — 
and  substitute  it  for  all  other  government  issues  of  legal-tender 
notes,  as  well  as  gold  and  silver  certificates ;  then  accumulate  from 
surplus  revenues  additional  gold  equal  to  all  uncovered  outstand- 
ing legal-tender  notes,  thus  simplifying  and  absolutely  settling  the 
quality  question  of  all  government  issues? 

2.  To  prevent  locking  up  money  in  the  treasury,  provide  for 
depositing  all  surplus  funds  over  current  requirements  in  the  banks. 

3.  Raise  the  limit  of  reduction  of  national-bank  notes  from 
$3,000,000  to  $6,000,000  per  month. 

4.  At  the  session  of  this  convention  in  San  Francisco  last  year, 
in  discussing  the  report  of  the  currency  committee,  which  allowed 


i;4  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

all  national  banks  to  issne  emergency  currency,  secured  by  a  deposit 
of  securities  with  the  Treasury  Department  under  careful  limita- 
tions and  a  6  per  cent,  per  annum  tax,  I  voted  for  that  report  be- 
cause I  agreed  with  its  underlying  principles  and  only  differed  in 
detail.  May  1  briefly  reiterate  the  reasons  therefor,  as  we  need  all 
possible  light  in  settling  this  all-important  question,  with  the  largest 
possible  safeguards  against  abuse? 

The  committee's  report  confines  relief  to  national  banks  alone. 
I  do  not  see  why  the  Manhattan  Company  or  Bank  of  America  in 
New  York  City,  the  Illinois  Trust  &  Savings  Bank,  of  Chicago,  or 
Wells,  Fargo  &  Co.,  of  San  Francisco,  and  kindred  organizations, 
should  not  be  entitled  to  the  same  assistance.  I  would  therefore 
grant  such  relief  to  the  great  centres  through  their  clearing-houses 
by  legalizing  "clearing-house  national-bank  notes"  on  practically 
the  same  form  as  present  issues.  Any  member  of  the  clearing- 
house desiring  such  advances,  must  deposit  with  the  clearing-house 
ample  cash  collaterals  approved  by  its  committee.  The  clearing- 
house certificates  should  be  forwarded  to  the  Comptroller  of  the 
Currency  and  exchanged  for  such  notes — 5  per  cent,  interest  being 
charged  from  the  date  of  such  issue  to  the  day  the  borrowing  bank 
deposits  funds  with  the  United  States  Treasurer  to  redeem  the 
outstanding  notes.  The  certificates  will  then  be  returned,  exchang- 
ed for  the  deposited  securities,  and  canceled.  Such  advances  should 
be  held  as   strictly  private. 

This  method  will  provide  extra  cash,  not  only  to  national,  but  to 
state  and  savings  banks,  trust  companies,  or  any  other  clearing- 
house banks,  in  times  of  financial  stress.  Country,  banks  in  calling 
for  their  own  deposits,  will  not,  as  heretofore,  be  met  with  the 
reply :  "No  currency  is  going  out  of  the  city."  The  burden  upon 
the  reserve  cities  will  not  be  great,  because  $33,000,000  in  clearing- 
house certificates  in  the  1873,  and  $66,000,000  in  the  1893,  panic 
sufficed  to  restore  confidence. 

With  this  method,  no  political  tinkering  will  break  down  the 
bars,  but  the  conservatism  of  the  clearing-house  committee  will 
prevent  unnecessary  issues,  the  rate  of  interest  will  prevent  inflation, 
and  redemption  will  automatically  take  place  as  soon  as  pressure 
for  funds  is  over.  This  method  is  far  better  than  the  clearing-house 
certificates  of  1873,  1884,  1890,  and  1893,  because  it  provides  cash 


BANKING  REFORM  AND  CURRENCY  SECTION  175 

to  pay  depositors  and  to  loan  to  all  solvent  parties,  and  also  to  meet 
country  demands,  whereas  certificates  could  not.  It  is  equal  in 
effect  to  the  1847,  1857,  and  1866  Bank  of  England  illegal  issues, 
which  allayed  panic  conditions  at  once.  It  will  check  the  bears  in 
their  Black  Friday  onslaughts.  The  Secretary  of  the  Treasury 
could  then  heave  a  sigh  of  relief  from  pressing  importunities. 
When  one  is  seriously  ill,  doping  with  sweetened  quack  medicine 
rarely  relieves,  but  unpalatable  medicine  may  be  necessary  to  re- 
covery. Knowing  periodical  distress  will  come,  why  not  provide 
a  remedy  on  lines  unquestionably  sound,  which  we  know  will  re- 
lieve, if  not  absolutely  cure?  In  the  matter  under  discussion  the 
trend  of  all  progressive  countries  is  toward  the  concentration  of  the 
power  to  issue  emergency  currency.  May  the  statesmen  of  this 
country,  which  is  advancing  by  leaps  and  bounds  far  ahead  of  all 
competitors  in  general  progress,  not  fail  to  provide  such  relief  in 
some  form,  the  benefits  of  which  will  be  incalculable!  I  care  not 
what  that  plan  may  be,  provided  it  be  on  such  sound  lines  that  our 
standard  of  value  may  never  be  tarnished,  that  distrust  may  be  dis- 
pelled, and  confidence,  that  bulwark  of  all  progress,  may  be  ours 
to  the  fullest  possible  extent. 


FINANCIAL  CRISES 

ADDRESS  DELIVERED  BY  THEODORE  E.  BURTON,  MEMBER  OF  THE  HOUSE  OF  REPRE- 
SENTATIVES, BEFORE  THE  AMERICAN  BANKERS' ASSOCIATION,  AT  NEW  ORLEANS, 
NOVEMBER,     IOX>2. 

In  order  to  understand  the  nature  of  financial  crises  it  is  neces- 
sary to  study  the  whole  field  of  trade  and  industry.  They  are  not 
independent  events,  but  bear  close  relations  to  changing  conditions 
in  the  business  world.  At  the  outset  it  is  necessary  to  define  three 
terms :  Financial  crisis,  depression,  and  poverty.  John  Stuart  Mill 
has  defined  a  financial  or  commercial  crisis  as  follows:  "There  is 
said  to  be  a  crisis  when  a  great  number  of  merchants  or  traders  at 
once  either  have,  or  apprehend  that  they  shall  have,  a  difficulty  in 
meeting  their  engagements."  The  crisis  which  he  defines  is  essen- 
tially  financial.     It  is   most   keenly   felt   at  banks   and   in   financial 


176     PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

centres.  It  may  occur  when  trade  and  industry  are  not  seriously 
affected.  It  is  of  brief  duration,  and  may  or  may  not  be  followed 
by  a  prolonged  disturbance.  A  crisis  is,  however,  usually  a  signal 
or  introduction  for  a  period  of  prolonged  disturbance,  during  which 
a  decided  change  for  the  worse  occurs.  This  disturbance  may  be 
described  as  a  depression  or  a  period  of  depression.  A  depression 
may  be  briefly  defined  as  a  protracted  season  in  which  the  activities 
and  profits  of  industry  and  trade  fall  materially  below  their  normal 
level.  Poverty  describes  a  condition  still  more  prolonged  than  a 
depression,  and  one  which  is  of  a  permanent  nature.  Crises  and 
depressions  appear  in  highly-developed  countries  where  trade  and 
industry  flourish  and  there  is  a  rapid  progress.  Poverty  exists 
where  there  is  a  general  condition  of  stagnation,  and  development 
either  does  not  exist  or  is  very  slow.  Crises  and  depressions  are 
severe  in  countries  which  from  decade  to  decade  show  the  greatest 
increase  in  wealth  and  material  prosperity.  An  eminent  financial 
writer  has  said :  "Paradoxical  as  it  may  seem,  the  richest  of  na- 
tions can  be  measured  by  the  violence  of  the  crises  which  they 
experience."  If  instead  of  "richest  nations"  he  said  "rapidity  in 
material  development  of  nations,"  this  statement  could  be  accepted 
as  substantially  true. 

In  order  to  explain  this  singular  phenomenon,  that  the  most 
advanced  and  progressive  countries  suffer  most  from  crises  and 
depressions,  it  is  necessary  to  seek  their  causes.  Their  underlying 
causes  can  be  traced  to  the  inevitable  changes  which  characterize 
modern  industrial  and  commercial  progress,  to  the  aggressive  spirit 
and  energy  of  progressive  peoples.  These  changes  require  the  con- 
stant absorption  of  exceptionally  large  amounts  of  capital  in  great 
enterprises,  the  completion  of  which  requires  a-  considerable  time, 
or  which  when  completed  are  not  immediately  profitable.  This; 
class  of  investments  disturbs  the  normal  relation  between  expendi- 
tures for  the  future  and  those  required  for  early  utilization.  Illus- 
trations may  be  found  in  such  instances  as  the  building  of  the 
great  trans-continental  railways,  the  Hoosac  tunnel  or  the  under- 
ground railway  in  New  York  City,  or  the  investment  of  capital  in 
great  establishments  which  are  made  necessary  to  meet  some  new 
demand  of  public  utility  or  convenience.  Equally  disturbing  are 
those  changes  in  methods  of  production  or  manufacture  occasioned 


BANKING  REFORM  AND  CURRENCY  SECTION  177 

by  inventions,  or  by  improved  machinery  and  methods  which  re- 
quire the  substitution  of  new  appliances  and  equipment  for  the  old. 
These  changes  require  the  loss  of  much  of  the  investment  which 
has  been  utilized  for  prior  demands  of  production.  Material  and 
appliances  which  have  been  used  to  furnish  supplies  are  abandoned 
to  the  scrap  heap,  and  great  investments  of  capital  are  lost.  An 
incident  of  this  progressive  tendency  is  the  unequal  development 
of  invention  in  different  lines,  and  greater  profits  in  certain  branches 
of  business  or  manufacture  than  in  others.  As  a  result  of  this  there 
is  an  absence  of  equilibrium  between  different  lines  of  production ; 
too  much  is  produced  of  some  things,  too  little  of  others.  In  a 
period  of  advancement  also,  when  there  is  an  increased  demand 
for  the  necessities  and  luxuries  of  life,  there  is  an  inevitable  tendency 
to  over-action,  or  to  engage  in  an  unusual  number  of  unprofitable 
undertakings,  manifesting  itself  in  seasons  of  expansion  by  an  un- 
usual amount  of  speculation  and  fraud. 

The  course  of  advancement  is  marked  by  a  demand  for  in- 
creased production,  which  stimulates  enterprise.  This  is  attended 
first  by  a  rise  in  prices,  then  by  a  great  increase  in  the  equipment 
for  production,  and  later  by  an  over-supply,  which  causes  prices  to 
fall.  In  the  course  of  these  disturbances,  prices  almost  always 
reach  and  pass  a  maximum  before  a  crisis  occurs.  The  crisis 
comes  when,  instead  of  a  demand  greater  than  the  supply,  the  supply 
is  greater  than  the  demand,  and  there  is  a  glut  in  the  market. 
Manufacturers  and  traders  are  confronted  by  slower  sales  and  by 
diminished  profits.  In  the  banking  business  the  visible  indications 
of  the  approach  of  a  crisis  are  an  increase  of  loans  and  discounts; 
that  is,  an  increase  greater  than  that  which  is  required  by  the 
ordinary  expansion  of  trade  and  industry ;  by  a  decrease  of  deposits, 
at  least  of  deposits  not  based  on  discounts ;  by  a  rise  in  the  rate  of 
interest,  or  a  scarcity  of  available  money ;  also  by  a  decrease  of 
specie  and  of  bank  reserve. 

One  of  the  most  accurate  indications  of  healthful  financial  con- 
ditions or  the  reverse  is  the  relation  between  specie  and  loans,  as 
shown  by  the  statements  of  the  banks.  In  the  first  half  of  the  last 
century  this  was  the  infallible  indication.  While  this  same  indica- 
tion now  forecasts  the  approach  of  a  crisis,  it  is  much  less  promi- 
nent. The  same  conditions  which  have  caused  its  diminished 
12 


i;8  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

prominence  as  an  indication  have  also  lessened  the  severity  of  crises. 
Among  them  are  the  growth  of  international  financial  relations,  and 
the  recognition  of  a  general  interest  which  renders  it  desirable  that 
the  stronger  should  support  the  weaker,  and  that  all  should  unite 
in  giving  attention  to  localities  or  interests  where  disturbances  exist. 
As  a  result,  assistance  is  rendered  where  support  is  needed  in  time 
of  stress.  There  is  also  the  adoption  of  substitutes  for  money, 
which  diminishes  the  strain  on  the  monetary  supply,  metallic  or 
paper;  the  larger  capital  invested  in  the  banking  business;  the 
custom  of  increasing  the  rate  of  discount  at  a  time  when  gold 
reserves  begin  to  diminish,  and,  as  important  as  anything,  the 
greater  skill  and  prudence  exercised  by  bankers. 

In  the  consideration  of  crises  in  our  own  country  it  is  necessary 
to  take  into  account  certain  exceptional  conditions  which  have  ex- 
isted or  which  now  exist  here.  Among  the  most  notable  causes  of 
crises  in  the  United  States  in  the  past  has  been  the  lack  of  certainty 
that  paper  money  would  be  redeemed  in  specie,  and  in  the  standard 
of  values,  whether  it  should  be  gold  or  silver.  Great  losses  and 
great  disturbances  have  arisen  from  the  evils  of  irredeemable  paper 
currency.  A  further  injury  has  arisen  from  frequent  changes  and 
constant  agitation,  in  regard  to  vital  matters  of  economic  and  fiscal 
policy,  such  as  tariffs  and  the  issue  of  paper  money.  Happily,  re- 
cent legislation  has  given  assurance  of  the  maintenance  of  the 
gold  standard,  and  public  sentiment  has  unequivocally  declared 
against  sudden  changes  in  economic  policy. 

The  notable  defect  at  the  present  time  is  the  absence  of  elasticity 
in  our  currency,  with  the  resulting  scarcity  at  times  when  large 
quantities  of  money  are  required,  and  the  tendency  to  speculation 
when  money  is  redundant.  It  requires  little  discrimination  to  dis- 
cover that  the  demands  for  money  are  unequal  at  different  seasons 
of  the  year,  and  in  the  same  seasons  of  successive  years.  The  term 
"autumn  drain"  has  been  applied  to  the  great  demand  for  currency 
in  the  autumn  season.  It  is  clear  that  the  quantity  of  paper  money 
should  be  so  regulated  that  it  may  increase  or  decrease  according  to 
the  requirements  of  trade.  The  function  of  the  treasury  as  a  bank  of 
deposit  also  has  an  injurious  effect,  because  of  the  tendency  to  lock 
up  money  in  the  government  vaults  when  it  is  most  needed,  and  to 
disburse  it  in  large  quantities  when  a  less  supply  would  be  sufficient. 


BANKING  REFORM  AND  CURRENCY  SECTION  179 

A  remedy  for  these  two  conditions,  the  absence  of  elasticity  in 
the  currency  and  the  accumulation  of  money  in  the  treasury,  has 
been  advocated  by  those  who  say  that  the  government  should  go 
out  of  the  banking  business.  The  issuance  of  greenbacks  in  the 
time  of  war  was  clearly  intended  as  a  temporary  expedient.  Presi- 
dent Lincoln,  in  his  message  of  December  1,  1862,  seemed  to  take 
the  view  that  the  United  States  notes  were  of  doubtful  expediency, 
and  to  regard  the  issuance  of  paper  money  as  the  function  of  the 
banks. 

While  the  proper  custody  of  government  money  presents  a  dif- 
ferent problem,  it  would  seem  that  some  method  might  be  devised 
under  which  a  limited  amount,  as  nearly  equal  as  possible,  from 
month  to  month,  might  be  retained  by  the  treasury,  and  the  balance 
made  part  of  the  circulation. 

For  the  practical  management  of  banks  with  a  view  to  prevent 
crises  no  rules  can  be  formulated  better  than  those  stated  by  Mr. 
Bagehot :  First,  that  in  the  time  of  alarm  loans  should  be  made 
only  at  a  very  high  rate  of  interest.  This  course,  he  says,  will 
operate  as  a  heavy  fine  on  unreasonable  timidity,  and  will  prevent 
borrowing  out  of  unnecessary  precaution.  Second,  that  at  this 
high  rate  loans  should  be  made  on  all  good  security  and  as  largely 
as  the  public  asks.  He  says,  "What  is  wanted  is  to  diffuse  the 
impression  that  though  money  may  be  dear,  still  money  is  to  be 
had." 

The  question  when  another  crisis  will  occur  presents  an  interest- 
ing inquiry.  The  answer  is  rendered  much  more  difficult  by  the 
different  conditions  which  prevail  preceding  each  successive  crisis, 
and  especially  at  the  present  time.  The  exceptional  conditions  of 
the  present  are  much  more  marked  in  our  own  country  than  else- 
where. We  have  attained  a  commanding  position  unknown  in  any 
other  country.  Our  development  has  not  only  been  great,  but  it 
has  been  attended  by  an  unusual  degree  of  equilibrium  between 
production  and  consumption,  by  skill  and  aggressiveness  in  obtain- 
ing access  to  new  markets,  and  by  a  recognition  of  community  of 
interests  not  known  before.  Tn  several  foreign  countries,  if  we 
may  judge  by  the  ordinary  indications,  the  unequaled  prosperity 
of  recent  years  has  reached  and  passed  its  zenith  ;  but  such  docs 
not   seem   to  be   the  case  in  the   United   States,   though   surely  a 


180  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

diminished  purchasing  power  in  other  countries  must  in  time  have 
an  injurious  effect  upon  our  country. 

One  general  factor  of  the  most  important  nature,  which  cannot 
be  overlooked  in  the  present  situation,  is  the  great  increase  in  the 
production  of  gold  in  the  past  ten  or  twelve  years.  This  increase 
stimulates  trade  by  increasing  the  monetary  supply  and  by  render- 
ing it  easier  for  the  debtor  to  meet  obligations.  Such  an  increase 
would  naturally  be  attended  by  a  very  considerable  increase  in 
prices ;  but  this  increase  in  prices  has  been  very  much  diminished  by 
the  cheapening  processes  of  invention  and  by  improvements  in 
manufacturing  and  in  transportation,  and  in  the  methods  of  man- 
aging business  enterprises.  An  increased  supply  of  metallic  money 
has  usually  been  attended  not  only  by  a  wholesome  increase  of 
wealth,  but  also  by  an  unhealthful  stimulus  to  industry,  which  in 
time  causes  over-action  and  results  in  a  crisis;  but  the  present  de- 
velopment is  marked  by  such  harmony  and  such  adaptability  to 
new  conditions  that  the  injurious  results  which  attend  an  increase 
of  metallic  money  have  not  been  felt  so  much  as  in  previous  years. 
It  must  be  expected,  however,  that  so  great  a  prosperity  cannot 
continue  without  abatement.  Still  it  is  certain  that  such  crises  as 
may  occur  will  be  but  temporary  checks  in  the  great  forward  move- 
ment. This  is  especially  true  in  our  own  favored  land.  Our  aim 
should  be  to  establish  such  a  degree  of  steadiness,  and  to  exercise 
such  a  caution  in  our  business  growth,  as  will  reduce  to  a  minimum 
the  deleterious  effects  of  crises  and  depressions. 


ECONOMIC  WASTE  OF  OUR  TREASURY  SYSTEM 

ADDRESS   DELIVERED   BY   LYMAN    J.    GAGE,    EX-SECRETARY   OF   THE   TREASURY,    BEFORE 
THE   AMERICAN    BANKERS'    ASSOCIATION,    AT    MILWAUKEE,    OCTOBER,    IQOI. 

In  every  country  there  is  a  more  or  less  intimate  relation  be- 
tween government  finances — debt  and  taxation — and  the  general 
commercial  or  industrial  affairs  of  such  country.  In  our  own 
country  that  intimacy  has  been  and  is  injuriously  close.  Does 
this  need  anv  demonstration?     I  think  not.     The  facts  of  history 


BANKING  REFORM  AND  CURRENCY  SECTION  181 

are  too  familiar,  and  memory  readily  recalls  those  periods  when 
our  whole  financial  and  industrial  progress  has  been  severely 
checked,  while  great  questions  relating  to  the  condition  of  the 
treasury  or  the  standard  of  money  have  awaited  decision.  It  has 
been  the  effort  of  your  association  from  the  beginning  to  assist  in 
establishing  the  government  finances  on  secure  foundations,  and  at 
the  same  time  to  reduce  to  the  smallest  degree  possible  the  depend- 
ency of  commercial  affairs  upon  treasury  operations.  While  under 
our  system  the  government,  in  a  broad  sense,  is  the  people,  and  the 
people  constitute  the  government,  yet  in  its  organization  it  is  a 
legal  entity,  separate,  distinct,  impersonal.  It  is  a  corporation  with 
rights,  duties,  obligations,  all  clearly  set  forth  and  defined  in  the 
Constitution  or  in  statute  law.  Within  its  proper  sphere  of  action 
it  is  supreme;  but  its  proper  sphere  of  action  is  limited,  and  it 
cannot  transcend  these  limits  without  harm  to  itself  and  injury 
to  the  people.  In  other  words,  there  are  laws  superior  to  the 
government — laws  which  it  cannot  defy  and  escape  penalty.  They 
are  not  written  laws,  but  are  discoverable.  They  are  varied  in 
form ;  but  I  refer  now  only  to  the  higher  economic  laws,  which 
have  a  way  of  self-operation,  blessing  the  obedient  and  banning 
the  violater.  Of  these  all  men  and  all  governments  should  be 
afraid,  and  to  their  mandates  respect  should  be  shown.  The 
thought  I  have  in  mind  will  be  file  more  distinctly  presented  by  a 
contrast  between  the  expressed  principles  of  a  neighboring  state, 
and  our  own  governmental  methods  as  they  have  been  made  fa- 
miliar to  your  knowledge  and  experience. 

Some  time  since  I  had  the  pleasure  of  a  long  talk  with  the 
financial  Minister  of  a  South  American  republic,  one  of  the  most 
securely  established  in  its  political  life  and  most  advanced  in  the 
elements  of  material  growth  and  industrial  prosperity.  Desiring  to 
know  his  government's  methods,  and  their  points  of  view  in  certain 
economic  particulars,  I  asked  him  a  series  of  questions,  to  which  he 
made  the  most  gracious  and  frank  replies.  I  confess  that  I  was 
surprised  and  not  a  little  humiliated,  as  a  citizen  of  this  great  Re- 
public, at  the  clear  perception  of  economic  relationships,  and  the 
evident  willingness  he  displayed  to  forgo  tempting  advantages 
in  the  present,  out  of  obedience  to  the  requirements  of  higher  con- 
siderations.    I  do  not  believe  that  I  can  do  better  than  to  repeat 


182  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

the   substance   of  that   conversation.     It    throws   some   clear   side- 
lights on  our  system  of  finance. 

"You  have,"  I  asked  him,  "some  sort  of  banking  system  in  your 
country  ?" 

"Oh,  yes.  We  have  a  system  operating  under  federal  authority, 
governed  by  federal  law,  and  subject  to  inspection  and  control  by 
federal  agents.  We  have  eight  large  banks,  each  with  several 
branches,  so  that  all  sections  of  our  country  are  supplied  with  bank- 
ing facilities." 

"Why  do  you  allow  banks  with  branches?  Why  not  make  them 
entirely  independent  of  each  other,  the  same  as  we  do?" 

"Well,  we  believe  that  a  fagot  of  many  twigs  is  safer  and 
stronger  than  the  separated  twigs  could  be.  It  has  worked  well. 
We  have  had  no  bank  failure  for  many  years." 

"Do  they  issue  notes  to  circulate  as  money?" 

"Yes,  limited  in  amount  by  their  relation  to  capital,  and  by  the 
percentage  of  specie  which  they  are  required  to  carry  against  note 
issues." 

"Why  do  you  not  make  the  banks  secure  their  notes,  as  we  do, 
by  the  pledge  of  your  government  bonds?  By  requiring  them  to 
do  this,  you  would  enlarge  the  market  for  your  securities,  and  thus 
lower  the  rate  of  interest  on  your  government  debt.  At  the  same 
time  you  would  make  the  bank  note  absolutely  secure  to  the  holder." 

"Yes,"  he  replied,  "but  this  apparent  advantage  might  prove  to 
be  fallacious  in  the  end.  In  the  first  place,  we  consider  the  bank 
currency  entirely  safe  to  the  holder  as  it  now  is.  In  the  next 
place  to  require  what  you  suggest  would  involve  a  tie-up  of  so 
much  of  the  bank  capital,  all  of  which  we  think  ought  to  be  avail- 
able to  the  uses  of  industry  and  trade." 

"Again,"  he  added,  "we  think  general  industries  and  business 
affairs  should  be  involved  to  the  smallest  degree  possible  with 
government  finances.  If  we  should  become  engaged  in  a  protracted 
and  exhausting  war,  the  price  of  our  bonds  might  fall.  The  value 
of  the  securities  upon  which  the  safety  of  the  bank  note  was  sup- 
posed to  rest  thus  declining,  distrust  and  panic  might  set  in  at  the 
most  inopportune  time — an  inopportune  time,  because  it  is  pre- 
cisely in  time  of  war  that  the  government  must  make  the  severest 
financial  exactions  from  its  people.     It  is  therefore  doubly  important 


BANKING  REFORM  AND  CURRENCY  SECTION  183 

that  general  business  should  be  protected  from,  rather  than  ex- 
posed to,  the  perturbations  in  government  finances  when  the  latter 
are  under  stress  and  strain.  It  is  just  then  that  we  need  the  greatest 
strength  and  the  most  steadiness  in  the  personal  affairs  of  our 
people,  for  it  is  from  them  that  we  must  draw  resources  and 
supplies." 

"One  more  question,"  I  urged.  "You  have,  I  know,  revenues 
somewhat  in  excess  of  expenditures,  and  necessarily  carry  a  work- 
ing balance  on  hand.  Where  do  you  keep  this  cash,  in  your  own 
strong  boxes,  as  we  do?" 

"No,"  he  answered,  "we  are  a  small  country,  not  rich,  like  you. 
If  we  locked  up  this  money,  amounting  sometimes  to  thirty  millions 
of  dollars,  it  would  be  an  economic  crime.  We  deposit  our  idle 
funds  among  the  eight  banks,  and  they  serve  as  an  important  aid  to 
industrial  activities,  while  they  are  always  subject  to  our  call  when 
needed." 

It  is  noticeable  that  on  three  particulars — legal  tender  paper 
money,  bank  note  issues,  and  the  keeping  of  the  public  moneys — 
we  pay  no  regard  to  the  opposing  argument.  Nevertheless,  the 
reasons  set  forth  by  that  finance  minister  for  adhering  to  a  policy 
so  radically  at  variance  with  our  own  are  deserving  of  deep  con- 
sideration. Having  found,  as  we  believe,  that  legal  tender  govern- 
ment paper  money  supplied  an  imperative  need  in  a  time  of  war, 
we  cannot  persuade  ourselves  to  abandon  the  use  when  the  emer- 
gency is  passed. 

In  his  country  the  bank  note,  while  safe  to  the  people,  is  the 
most  valuable  instrument  by  which  the  credit  of  a  bank  can  be 
made  available  to  the  borrower  for  the  uses  of  industry  and  com- 
merce. With  us  the  bank  note,  while  a  good  medium  of  exchange, 
is  as  costly  to  the  borrower  as  capital,  since  an  investment  of 
capital  equal  to  the  bank  note  itself  is  a  condition  precedent  to  its 
issue.  In  his  country  the  moneys  taken  from  the  people  by  tax- 
ation are  not  actually  withdrawn  from  commercial  uses;  they  are 
merely  transferred  from  public  ownership  in  the  payment  of  public 
expenditure  to  the  private  creditor  of  the  government.  With  us 
the  proceeds  of  taxation  are  entirely  withdrawn  from  commercial 
uses  and  held  in  idle  hoard  in  the  public  treasury  until  actually  dis- 
tributed for  public  expenditures. 


184  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

Has  our  government's  course  been  a  wise  one?  Taking  the 
last  thirty  years,  what  sum  on  the  average,  in  excess  of  an  ample 
working  balance,  has  the  treasury  kept  under  lock  and  key  and  away 
from  all  current  use  in  the  fields  of  industry  and  exchange?  The 
amount  is  found  to  average  fifty  millions  of  dollars. 

If  these  surplus  millions  had  been  deposited  with  National  banks 
in  the  clearing-house  cities,  in  the  proportion  the  relative  capital 
of  each  bank  bears  to  the  whole  capital ;  and  if,  secondly,  the  only 
security  to  the  government  had  been,  in  case  of  bank  failures,  a 
prior  lien  on  such  bank's  assets,  not  a  dollar  of  loss  would  the 
treasury    have    suffered. 

Next,  ff  under  these  conditions  the  banks  had  paid  interest  to 
the  government  at  the  rate  of  2  per  centum  upon  the  funds  so 
deposited,  how  much  would  the  treasury  have  been  benefited? 
Answer:     Thirty-two  millions  of  dollars. 

Lastly,  with  this  fund  as  an  aid  to  their  general  operations  in 
the  field  of  trade  and  commerce,  to  what  extent,  on  the  average, 
would  the  banks  have  been  able  to  increase  credit  accommodations 
to  the  people?     Answer:     Two  hundred  millions  of  dollars. 

Have  we  not  been  guilty  of  an  enormous  economic  waste  by 
reason  of  our  peculiar  Treasury  system? 

I  could  pursue  into  detail  the  faults  with  which  our  financial 
system  may  be  justly  charged.  But  the  matter  has  been  presented 
over  and  over  until  the  theme  is  badly  worn.  Permit  me,  however, 
to  summarize  into  several  brief  propositions  an  expression  of  my 
own  financial  convictions. 

First:  I  believe  it  to  be  most  desirable  that  the  demand  lia- 
bilities of  the  government  known  as  legal  tender  notes  should  be 
put  in  the  way  of  retirement  and  cancellation. 

Second :  I  believe  that  this  can  be  accomplished  without  any 
burden  of  interest  cost  to  the  public  treasury. 

Third :  I  believe  that  our  system  of  bank  note  circulation  can 
be  and  ought  to  be  so  modified  as  to  make  it  more  responsive  to 
commercial  and  industrial  requirements,  without  any  increase  of 
risk  to  the  bill  holder. 

Fourth :  I  believe  that  beyond  acting  as  a  guardian  and  trustee 
for  the  people  in  relation  to  national  banks,  the  government's 
guaranty  to  bank  note  issues  should  cease. 


BANKING  REFORM  AND  CURRENCY  SECTION  185 

Fifth :  I  believe  that  the  public  moneys  in  excess  of  a  reason- 
able working  balance  for  daily  use  should  be  deposited  in  national 
banks.  That  a  simple  and  safe  system  of  distribution  of  funds  can 
be  devised  I  have  no  doubt. 

Sixth :  I  believe  that  in  periods  of  national  peace  and  pros- 
perity the  public  revenue  should  be  somewhat  in  excess  of  public 
expenditures,  and  that  the  surplus  revenue  should  be  applied  to 
the  reduction  of  the  public  debt. 

Time  will  not  permit  me  to  support  these  statements  of  belief 
by  argument  now,  and  I  will  leave  them  to  be  the  subject  of  your 
own  reflection. 

In  the  beginning  of  my  remarks  I  expressed  the  opinion  that 
there  is  too  close  an  intimacy  between  the  government's  finance  and 
our  commercial  affairs,  and  appealed  to  your  memory  of  our  history 
in  support  of  that  proposition.  It  is  a  comfort  and  satisfaction  to 
note  that  at  the  present  moment  the  injurious  effect  of  such  inti- 
macy appears  to  be  at  a  minimum.  The  public  treasury  is  strong, 
the  public  credit  is  high,  and  at  the  same  time  the  situation  of 
general  finance,  as  represented  by  banking  and  commercial  inter- 
ests, is  most  satisfactory. 

I  want  to  close  my  talk  by  presenting  some  facts  in  comparison, 
which  will  at  least  illustrate  the  strong  and  satisfactory  condition  of 
the  national  finances.  While  British  consols  drawing  2^4  Per  cent, 
per  annum  are  quoted  at  92,  German  Imperial  3  per  cent,  bonds  at 
88 J/2,  Russian  4s  at  102,  and  French  3s  at  102,  United  States  2 
per  cent,  bonds  are  quoted  at  107,  and  United  States  4  per  cent, 
bonds  of  1925  at  138. 

It  may  throw  some  light  upon  this  comparison  so  favorable  to  us 
if  I  particularize  a  little.  On  April  1,  1898,  the  interest  bearing 
public  debt  stood  at  $847,366,680.  Deducting  from  this  the  cash 
then  on  hand  in  the  treasury,  amounting  to  $226,166,944,  leaves 
$621,199,736.  Incidental  to  the  war  with  Spain  bonds  were  issued 
to  nearly  two  hundred  millions,  so  that  on  November  1,  1899,  tne 
interest  bearing  debt  had  risen  to  $1,036,049,020,  or  deducting  cash 
in  the  treasury  amounting  to  $289,391,540,  the  debt,  less  cash. 
stood  at  $756,657,480,  an  increase  of  $135,457,744  between  April 
1,  1898,  and  November  1,  1899. 

On  August  1,  1901,  the  interest  bearing  debt  stood  at  $985,476,- 


l86    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

060;  less  cash  in  the  treasury,  $327,368,877;  making  debt,  less 
cash,  $658,107,183,  a  reduction  of  $98,550,297;  or  having  now  no 
regard  for  the  increased  cash  in  the  treasury,  we  find  that  the 
face  amount  of  the  interest  bearing  debt,  which  stood  on  November 
1,  1899,  at  $1,046,049,020,  now  stands  (August  1)  at  $985,476,060, 
a  reduction  of  $60,572,960. 

But  this  is  only  a  partial  statement.  Concurrently  with  this 
reduction  of  the  face  of  the  debt,  there  has  been  a  reduction  almost 
equally  great  in  the  amount  of  interest  which  then  burdened  the 
future.  Of  the  moneys  coming  into  the  treasury  during  the  short 
period  under  review,  $43,582,005  has  been  used  to  settle  and  dis- 
charge interest  which  would  otherwise  have  been  a  charge  upon  the 
treasury  during  the  next  four  to  eight  years.  By  the  use  of  some- 
thing more  than  forty-three  millions,  interest  to  the  amount  of  $54,- 
548,424  was  settled — the  difference  of  nearly  eleven  millions  being  a 
nominal  profit  to  the  treasury. 

This  operation  was,  as  you  all  understand,  incidental  to  the  re- 
funding of  a  portion  of  the  public  debt  into  the  new  2  per  cent, 
bonds.  To  summarize  briefly :  Within  two  years  the  principal 
of  the  public  debt  has  been  reduced  by  the  sum  of  $60,572,960; 
the  interest  has  been  anticipated  and  settled  to  the  amount  of 
$54,548,424 — a  total  reduction  of  $115,121,384;  while  the  annual 
cost  for  carrying  the  debt  in  the  future  has  been  reduced  from 
$40,347,884  annually,  where  it  stood  on  November  1,  1899,  to 
$29,723,019 — a  net  saving  annually  of  $10,624,865.  The  cash  in 
the  treasury  has  been  increased  from  $289,000,000  on  November 
1,  1899,  to  $327,000,000  on  August  1,  1901  —a  gain  of  $38,000,000. 
On  November  1,  1899,  of  the  money  in  the  treasury  $100,000,000 
in  gold  was  regarded  as  a  traditional  reserve  for  the  redemption 
of  the  legal  tender  notes.  On  March  14,  1900,  by  solemn  statute, 
$150,000,000  was  specifically  pledged  to  this  purpose  and  abundant 
power  placed  in  the  hands  of  the  Secretary  of  the  Treasury  to  re- 
store the  amount  should  it  become  impaired. 

These  facts  go  far  to  explain  the  superior  credit  of  the  United 
States  in  the  world's  market,  as  illustrated  by  quotations  on  the 
public  bourse.  The  facts  show  a  condition  of  unparalleled  strength 
in  the  public  treasury.     Nor  has  this  strength  been  gained  by  ex- 


BANKING  REFORM  AND  CURRENCY  SECTION  187 

haustive  taxation  of  individual  or  corporate  resources.     Every  evi- 
dence exists  of  a  general  well-being  in  industry  and  trade. 

Looked  at  from  the  standpoint  of  true  statesmanship,  it  would 
appear  that  the  present  is  the  most  propitious  hour  in  all  our 
history,  and  as  favorable  as  any  period  we  may  hope  for  in  the 
future,  to  enter  upon  reasonable  and  judicious  measures  to  elimi- 
nate all  elements  of  financial  weakness  which  experience  has  brought 
to  light,  and  to  perfect  our  now  faulty  system  of  currency.  We 
need    judicious,    careful    reform;    we    do    not    need    revolutionary 


NATURAL  BANK  CURRENCY  AND  NATIONAL 
BANK  CURRENCY 

ADDRESS  DELIVERED  BY  WILLIAM  B.  DEAN,  OF  ST.  PAUL,  MEMBER  OF  THE  INDIAN- 
APOLIS MONETARY  COMMISSION,  BEFORE  THE  MINNESOTA  BANKERS'  ASSO- 
CIATION, AT   DULUTH,  JULY   24,   19OI. 

The  distinction  your  committee  of  invitation  has  conferred  up- 
on me  may  possibly  be  attributed  to  my  connection  with  the  work 
of  the  Monetary  Commission  of  the  Indianapolis  Convention.  May 
I  speak,  for  a  few  minutes,  of  this  convention?  It  was  composed 
of  delegates  from  the  commercial  bodies  of  the  principal  cities  in 
twenty-eight  states  and  territories,  representing  in  its  composition 
the  vigorous  and  intelligent  men  in  whose  hands  are  the  commercial 
activities  of  our  cor  "try.  For  years  the  business  of  the  nation 
had  been  ground  between  the  upper  and  nether  millstone  of  the 
gold  and  silver  question.  The  possible  election  of  Mr.  Bryan  was 
regarded  as  involving  the  most  tremendous  and  terrible  conse- 
quences. With  silver  the  standard  of  value  and  gold  becoming  a 
commodity  of  merchandise,  it  was  believed  that  such  a  financial 
convulsion  would  shock  the  country,  in  the  readjustment  that  must 
occur,  that  ruin  and  desolation  would  pervade  all  its  business 
affairs. 

The  men  who  assembled  at  Indianapolis  determined  that,  if  it 
were  possible,  an  end  should  be  put  to  all  doubt  as  to  the  standard 
■  ,   value,  by  such  legislation  in  Congress  as  would  settle  the  qucs- 


iSS  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

tion  so  far  as  it  could  be  done  by  legislative  act.  The  convention 
ordered  the  appointment  of  a  Monetary  Commission  of  eleven 
members,  in  the  event  of  Congress  itself  neglecting  to  appoint  one, 
and  this  commission  was  instructed  to  prepare  a  plan,  the  funda- 
mental basis  of  which  should  be,  first,  that  the  present  gold  standard 
should  be  maintained;  second,  that  steps  should  be  taken  to  insure 
the  ultimate  retirement  of  all  classes  of  United  States  notes  by  a 
gradual  and  steady  process,  and  that  there  should  be  a  separation 
of  the  revenue  and  note-issue  departments  of  the  treasury ;  third, 
that  a  banking  system  should  be  provided  which  should  furnish 
credit  facilities,  and  especially  with  a  view  of  securing  such  a  dis- 
tribution of  the  loanable  capital  of  the  country  as  will  tend  to  equal- 
ize the  rates  of  interest  in  all  parts  thereof. 

It  was  my  good  fortune  to  enjoy  the  honorable  distinction  of 
association  in  this  important  duty  with  such  men  as  ex-Senator 
Edmunds,  ex-Secretary  of  the  Treasury  Fairchild,  Professor 
Laughlin,  of  the  University  of  Chicago,  Mr.  Stuyvesant  Fish;  the 
president  of  the  Illinois  Central  Railroad,  and  other  gentlemen  of 
conspicuous  prominence  in  the  localities  from  which  they  were 
chosen.  The  meetings  of  the  commission  were  held  in  the  city  of 
Washington,  and,  after  weeks  of  the  most  serious  consideration  of 
the  questions  submitted  to  them,  their  report  was  made  to  a  second 
meeting  of  the  convention,  held  about  a  year  later  in  Indianapolis, 
which  was  attended  by  even  a  larger  number  of  delegates,  and  of 
the  same  sterling  character  as  the  first. 

The  report  of  the  commission  was  unanimously  adopted  and 
commended  in  the  strongest  possible  terms.  An  extended  report, 
a  volume  of  five  hundred  pages,  prepared  at  its  direction  by  Pro- 
fessor Laughlin,  of  the  University  of  Chicago,  embodies  the  reasons 
which  influenced  the  commission  in  reaching  its  conclusions.  As 
this  report  is  now  being  used  by  twenty-five  or  thirty  colleges, 
among  which  is  Yale  College,  as  a  textbook,  the  value  of  the 
services  of  the  Monetary  Commission  and  the  correctness  of  the 
conclusions  presented  in  its  report  may  be  estimated.  If  I  may 
speak  of  the  work  of  the  members  of  the  commission — and  I  de- 
sire to  do  so  in  a  manner  as  wholly  impersonal  as  possible — I  can 
say  that  the  country  was  never  served  by  any  of  its  citizens  who 
were  prompted  by  higher  and  more  patriotic  motives.     The  only 


BANKING  REFORM  AND  CURRENCY  SECTION  189 

conclusion  sought  was  one  that  would  best  promote  and  maintain 
the  highest  standard  of  financial  truth  and  honesty.  What  were 
its  recommendations? 

That  the  existing  gold  standard  should  be  maintained  with  the 
free  coinage  of  gold ;  no  more  silver  dollars  to  be  coined ;  the  sepa- 
ration of  the  monetary  and  fiscal  operations  of  the  Treasury;  the 
redemption  and  cancellation  of  all  government  notes,  and  the  pay- 
ment of  all  government  obligations  in  gold,  including  the  exchange 
of  gold  for  silver  dollars,  and  vice  versa;  prohibiting  the  issue  of 
any  notes  in  denominations  of  less  than  ten  dollars,  excepting  silver 
certificates.  The  authority  for  national  banks  to  establish  branches 
was  recommended,  and  the  organization  of  national  banks  of  $25,- 
000  capital ;  the  gradual  change  from  the  present  system  of  issuing 
bank-notes  by  government  bonds  to  issues  depending  for  security 
upon  a  guaranty  fund,  contributed  by  all  banks  issuing  notes,  to- 
gether with  the  general  assets  of  the  banks  and  the  stockholders' 
liability. 

The  commission,  in  its  report,  made  other  recommendations  of 
minor  importance ;  yet,  all  suggesting,  as  it  was  believed,  an  im- 
provement on  existing  conditions. 

Several  of  the  recommendations  were  adopted  by  Congress  and 
became  law  under  the  act  of  March,  1900.  It  is  to  be  regretted 
that  Congress  failed  to  adopt  the  recommendation  for  the  exchange 
of  silver  dollars  for  gold,  to  place  the  gold  standard  beyond  question 
so  far  as  that  could  be  done  by  legislative  act. 

I  do  not  hesitate  to  declare,  without  fear  of  successful  contra- 
diction by  anyone  aware  of  the  facts,  that  this  legislation,  imperfect 
as  it  may  be  in  some  highly  desirable  respects,  would  probably  not 
yet  have  been  obtained  had  it  not  been  for  the  unceasing  exertions 
of  some  of  the  gentlemen  who  took  the  most  active  part  in  pushing 
the  work  of  the  Indianapolis  convention. 

In  thus  recalling  to  your  attention  the  work  of  the  Monetary 
Commission,  the  excellence  of  its  recommendations  must  commend 
themselves  to  your  consideration.  If  any  gentleman  of  the  Bankers' 
Association  should  be  inclined  to  take  issue  with  any  of  the  con- 
clusions of  the  commission,  it  would  probably  be  on  the  subject 
which  you  have  invited  me  to  present  to  you  upon  this  occasion. 
But  upon  that  may  I  not  claim  your  favorable  presumption,  plead- 


Iqo  PRACTICAL  PRORLEMS  IN  RANKING  AND  CURRENCY 

ine:  the  careful  and  studious  attention  which  the  commission  devoted 
to  the  study  of  the  question,  and  its  patriotic  desire  to  submit  a 
banking-  plan  conceived  to  be  for  the  greatest  good,  not  of  bankers 
only,  but  of  the  interests  of  the  whole  country? 

While  we  are  accustomed  to  look  up  to  bankers  as  the  doctors 
of  finance,  from  whom  is  derived  our  instruction  in  all  that  is 
soundest  and  best  in  banking  and  all  matters  pertaining  to  money, 
still  experience  has  taught  us  that  even  with  bankers  errors  in  judg- 
ment are  sometimes  found.  In  a  series  of  questions  sent  out  by 
the  Monetary  Commission  to  about  a  thousand  bankers  and  others, 
asking  for  suggestions  on  the  subjects  named,  such  as  the  continued 
coinage  of  the  silver  dollars  and  the  retirement  of  the  greenbacks, 
it  was  astonishing  to  find  a  large  number  who,  in  their  replies, 
favored  the  policy  of  the  government  continuing  to  buy  silver  and 
to  coin  silver  dollars,  and  a  larger  number,  probably,  who  were 
opposed  to  retiring  the  greenbacks ;  and  yet,  to  all  sound  thinkers 
on  these  two  propositions,  it  does  not  seem  possible  that  any  differ- 
ence of  opinion,  especially  among  bankers,  could  possibly  exist. 
The  silver  dollars  with  their  50  per  cent,  fiat,  and  the  greenbacks 
with  their  100  per  cent,  fiat,  have  given  rise  to  the  most  pernicious 
heresies  with  which  our  country  has  ever  been  afflicted.  The 
greenback  has  been  glorified  as  the  blood-stained  savior  of  the 
Union;  yet  it  defrauded  the  soldier  of  a  large  part  of  his  hard- 
earned  pay,  added  more  than  a  third  to  the  enormous  debt  with 
which  the  Civil  War  burdened  the  country — and,  worst  of  all,  re- 
mained to  teach  the  nation  a  false  notion  concerning  money,  which, 
in  1893,  might  have  wrecked  the  Treasury  itself. 

I  believe  that  a  great  advance  has  been  made  in  the  financial 
education  of  the  people  within  the  past  few  years.  Questions  that 
were  debatable  not  long  since  are  now  considered  settled  and  be- 
yond the  realm  of  discussion ;  but  believing  that  much  remains  to  be 
said  on  the  topic  assigned  me,  I  venture  to  present  some  thoughts 
for  your  consideration. 

The  title  your  secretary  was  pleased  to  give  my  subject  was, 
"Asset  Currency  and  National  Bank  Currency."  May  I  call  my 
subject  "Natural  Bank  Currency  and  National  Bank  Currency"? 
I  choose  this  title,  not  because  of  its  alliteration,  but  rather  because 
it  more  accurately  expresses  what  I  shall  seek  to  maintain,  that  a 


BANKING  REFORM  AND  CURRENCY  SECTION  191 

natural  bank  currency  is  not  less,  but  more,  a  national  currency 
than  that  issued  by  the  banks  under  the  present  law.  The  present 
system  of  issuing  bank-notes  was  founded  primarily  in  order  to 
make  a  forced  market  for  United  States  bonds.  The  law  was  de- 
rived largely  from  the  free  banking  system  of  the  states  of  New 
York,  Ohio,  and  Michigan,  as  they  existed  before  i860.  The  neces- 
sities of  the  general  government  at  the  time  of  the  enactment  of  the 
law  suggested  the  use  of  United  States  bonds  as  a  basis  for  the 
banks  to  issue  currency  which  would  be  as  safe  as  government 
bonds,  and  at  the  same  time  enlarge  the  demand  for  the  bonds 
which  the  government  so  sorely  needed  to  sell.  In  order  to  make 
the  monopoly  for  the  government  complete,  a  10  per  cent,  tax  was 
laid  upon  the  issues  of  state  banks,  which  caused  immediate  re- 
tirement of  their  notes,  and  left  the  field  for  circulating  notes  en- 
tirely to  the  new  national  banks. 

It  is  a  remarkable  commentary  on  the  system  of  banks  issuing 
a  bond-secured  circulation  that,  when  the  national  bank  currency 
act  was  proposed,  a  committee  of  the  bank  officers  of  New  York 
City  reported  that  "it  was  plain  that  the  act  would  foster  a  system 
of   'wild-cat'   banking,"    showing   how   vividly    the    impression    re- 
mained of  the  bond-secured  currency  that  had  been  issued  a  few 
years  before,  under  the  laws  of  the  states  of  Illinois,  Michigan,  Wis- 
consin, and  Minnesota,  and  which  had  met  disastrous  results.     To 
say  that  the  national  banking  act  has  many  admirable  features  to 
commend  it,  is  quite  superfluous.     Having  the  national  banks  in  all 
the  states  under  a  uniform  law,  with  issues  uniform  in  appearance, 
with  reports  and  examinations  of  the  most  searching  kind,  are  ad- 
vantages and  safeguards  that  should  never  be  dispensed  with  under 
any  banking  law  or  system.     But  admirable  as   are  many  of  the 
provisions  of  the  act,  experience  shows  that  in  its  ability  to  furnish 
a  banking   currency   for   the   country,   sufficient   for  trying   emer- 
gencies of  a  commercial  panic,  it  has  been  a  failure.     In  the  year 
1866  soon  after  the  act  had  been  generally  accepted  by  the  banks 
all  over  the  country,  their  notes  in  circulation  amounted  to  $281,- 
479,000;  the  deposits,  at  the  same  time,  in  the  banks  amounted  to 
$598,077,000.     In    TR82  the  circulation  had  increased  to  $358,742,- 
000,  an  increase  of  about  27  per  cent.,  being  the  highest  amount  the 
national  banks  have  ever  issued  ;  the  deposits  at  the  same  time  had 


I92    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

increased  to  $1,138,071,000,  or  about  90  per  cent,  more  than  in 
1866.  In  1900  the  circulation  had  not  only  not  increased,  but  was 
about  seventy-five  millions  less  than  in  1882,  and  only  about  two 
and  one-half  millions  more  than  in  1866,  notwithstanding  a  large 
increase  in  the  number  of  national  banks  and  an  increase  in  bank 
deposits  to  $2,602,100,000,  or  nearly  336  per  cent,  over  1866.  This 
showing  would  seem  to  indicate  either  that  bank  checks  and  other 
instruments  for  the  transfer  of  credits  were  taking  the  place  of 
bank-note  currency,  or  that  there  are  fatal  obstacles  in  the  way  of 
bank-note  issues,  which  must  be  removed  if  the  banks  are  to  serve 
the  commercial  public  with  these  useful  instruments.  Is  it  not 
proper  to  inquire  whether  the  issuing  of  bank  currency  based  upon 
United  States  bonds  as  security  may  be  regarded  as  a  permanent 
principle?  As  a  patriotic  American,  believing  in  the  great  growth 
in  wealth  and  strength  of  our  beloved  country,  I  fondly  anticipate 
the  happy  day  when  the  public  debt  shall  be  paid  off.  Since  the 
Civil  War,  more  than  two-thirds  of  the  debt  has  been  paid,  and 
every  month  we  now  read  of  the  Secretary  using  the  Treasury  sur- 
plus in  the  purchase  of  bonds,  and  reducing  the  debt  still  more. 
When  the  last  bond  is  bought,  and  the  nation  has  no  longer  any 
bills  payable,  upon  what  bonds  then  shall  the  national  banks  base 
the  issue  of  their  notes?  The  question  needs  no  reply;  the  ex- 
perience of  past  years  suggests  that  no  bonds  can  take  the  place  of 
government  bonds.  Suppose,  however,  that  our  patriotic  anticipa- 
tions be  too  delusive,  and  that  a  public  debt  is  to  remain,  as  with 
nations  of  Europe.  Is  the  debt  to  grow  in  amount  so  as  to  keep 
pace  with  the  growing  business  of  the  country  that  the  demand  of 
the  national  banks  for  circulation  may  be  supplied?  Even  were 
government  bonds  to  remain  abundant,  a  currency  issue  upon  them 
is  rigid  and  undesirable.  Bank  currency,  like  bank  deposits,  should 
owe  its  origin  and  its  value  to  the  wealth  of  the  country  in  process 
of  exchange. 

But  let  us  dismiss  this,  and  consider  the  system  as  it  is  to-day, 
in  our  inquiry  for  what  is  best.  Is  the  national-bank  circulation  a 
true  bank  currency?  Manifestly  not.  Experience  shows  that  na- 
tional bank  currency  neither  increased  during  periods  of  greatest 
activity  nor  diminished  during  periods  of  depression.  While  all 
other  forms  of  bank  obligations,  such  as  cashier's  checks,  certifi- 


BANKING  REFORM  AND  CURRENCY  SECTION  193 

cates  of  deposits,  drafts,  and  checks  followed  the  alternations  of 
increasing  and  diminishing  commercial  demands,  bank-note  cir- 
culation has  been  but  little  affected.  Indeed,  bank-notes  issued 
upon  United  States  bonds  as  security  appear  to  me  to  be  only  a 
device  by  which  money  invested  in  the  bonds  may  be  released  and 
restored  to  the  bank  investors,  less  whatever  premiums  may  be 
paid  for  the  bonds ;  the  banks  receiving  interest  upon  the  bonds, 
and  at  the  same  time  having  all  the  money  invested  returned  to 
them,  less  the  small  premium  the  bonds  may  cost.  That  is  to  say, 
a  bank  of  $100,000  capital,  and  corresponding  deposits,  may  invest 
about  $106,000  in  United  States  bonds,  and  within  due  time  receive 
from  the  comptroller  $100,000  currency,  making  a  permanent  in- 
vestment in  the  premium  of  $6,000,  and  receiving  annually  interest 
upon  the  bonds  to  the  amount  of  $2,000.  It  is  only  the  cutting-up 
of  the  United  States  bonds  in  small  amounts,  and  using  them 
through  the  banks  as  part  of  the  circulation  of  the  country.  It  is 
apparent  that  this  circulation  from  its  very  nature  can  bear  no  rela^ 
tion  to  the  business  needs  of  the  country.  Its  volume  is  fixed  by 
the  profit  to  be  made  upon  bond  investment,  and  not  regulated  by 
commercial  demand.  This  is  more  clearly  shown  by  the  very  course 
of  the  national-bank  notes  themselves.  They  are  issued  as  the 
promissory  notes  of  the  banks.  They  are  ostensibly  its  bills  pay- 
able, the  same  as  any  other  of  its  obligations.  But  how  differently 
they  are  treated.  Where  cashier's  checks,  certificates,  or  drafts 
are  paid  or  redeemed  by  the  bank,  the  proper  account  is  charged 
with  the  amount  paid  for  the  redemption,  and  the  instrument  is 
canceled,  but  with  a  bank-note — the  bank's  promise  to  pay — if  it  is 
ever  redeemed,  is  put  in  the  drawer  with  other  cash  assets  of  the 
bank,  and  counted  as  cash.  How  extraordinary  and  absurd  it 
would  appear  to  a  bank  officer  if  a  merchant  seeking  an  accommo- 
dation should  list  among  his  assets  in  the  statement  of  his  condition 
a  lot  of  his  paid  promissory  notes!  This  is  not  to  say  that  the  hank- 
notes  so  counted  as  cash  are  not  good.  They  have  behind  them  the 
pledge  of  the  bonds,  besides  having  a  paramount  lien  on  the  assets 
of  the  bank  and  the  liability  of  the  stockholder,  but  it  illustrates 
the  fallacy  of  calling  such  issues  a  currency  adapted  to  the  needs  of 
business. 

Setting  aside  the   right   the  bank-notes   have  of  a   paramount 
13 


I94     PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

lien  on  all  the  bank  assets  and  the  stockholders'  liability,  let  us  in 
passing-  inquire  as  to  the  certainty  of  the  value  of  the  bonds  which 
arc  commonly  regarded  as  the  chief  and  great  security.     When  the 
National  Banking  Act  went  into  effect,  United  States  bonds  were 
selling   for  specie  very  much  below  their   face   value.     The  whole 
country  was  in  a  state  of  specie  suspension,  and  legal  tenders  had 
taken   the  place  of  gold  and  silver,  fluctuating  in  value   with  the 
varying  operations   of   the    army    and    navy.     Victories,    with   the 
probable  success  of  the  Union  armies,  advanced  the  value  of  legal 
tenders,    as  disasters   and  defeats  depressed   them.     Since  the   re- 
sumption of  specie  payments  and  the  settling  of  the  finances  of  the 
country  again  upon  a  solid  foundation,  United  States  bonds  have 
always  sold  at  a  most  gratifying  premium.     The  conjecture  at  this 
time  doubtless  may  be  wholly  academic,  but  it   is   interesting  to 
imagine  what  would  have  been  the  effect  upon  the  banks  if  the 
theory  had  prevailed,  advocated  a  few  years  ago  by  so  many  of  the 
leading  men  of  both  political  parties,  of  paying  off  United  States 
bonds  in  greenbacks  and  discharging  in  this  way  a  matured  interest 
obligation  with  a  demand  obligation,  bearing  no  interest.     Would 
the  greenbacks  then  have  taken  the  place  of  the  bonds  as  security 
for  circulation?     If  not,  what  would  have  been  the  basis?    We  live 
in  the  happy  hope  that  this  dishonest  delusion  has  vanished  forever, 
but  when  we  recall  the  names  of  Senators  Thurman,   Pendleton, 
Bayard,  Beck,  Governor  Morton,  General  Butler,  and  others  who 
contended  for  the  right  to  pay  government  bonds  in  that  way,  we 
cannot  safely  declare  that  that  vagary  will  never  again  return  to 
plague  us.     Suppose  the  country  should  be  plunged  into  a  war  with 
some  of  the  formidable  powers,  what  then  ?     Suppose,  when  Presi- 
dent Cleveland  so  chivalrously  took  up  the  cause  of  Venezuela,  for 
which  the  United  States  has  never  enjoyed  any  gratitude,  England 
had   accepted   the    challenge   and   with    her    tremendous   navy   had 
blockaded  some  of  our  great  Atlantic  cities,  what  then  would  prob- 
ably have  been  the  price  of  United  States  bonds,  and  the  value  of 
circulation  based  upon  them?     As  the  Boer  war  has  reduced  the 
price  of  British  consols  from   114  or  more  to  92  or  less,  so  there 
can  be  no  doubt  our  own  bonds  would  have  been  similarly  affected. 
With  our  bonds  below  par  and  a  run  upon  the  Treasury  for  the 
payment  of  legal  tenders  fn  gold,  would  the  Treasury  again  suspend 


BANKING  REFORM  AND  CURRENCY  SECTION  195 

specie  payments  as  it  did  so  unfortunately,  and,  as  many  believe, 
unnecessarily,  during  the  Civil  War;  and  with  suspension,  in  what 
would  our  national-bank  notes  be  redeemed?     In  legal  tenders,  or 

gold. 

With  United  States  bonds  as  security  for  the  redemption  of 
bank-notes,  and  the  bond  selling  below  par,  it  would  seem  to  be 
inevitable  that  a  general  suspension  of  specie  payments  must  follow. 
So  close  a  relation  between  the  perils  of  government  and  the 
general  business  of  the  country  is  surely  to  be  deprecated,  and  ought 
not  to  exist.  That  it  need  not  exist  was  clearly  illustrated  during 
our  Civil  War.  While  the  obligations  of  the  government  were  then 
selling  far  below  par  and  the  indebtedness  of  the  people  of  the 
whole  country  east  of  the  Rocky  Mountains  was  being  paid  in 
depreciated  money,  the  people  of  California  determined  that  their 
money  operations  should  be  maintained  upon  a  specie  basis,  and  to 
the  lasting  honor  of  their  splendid  integrity  let  it  be  said  that  they 
never  departed  from  the  gold  standard  in  the  payment  of  their  debts. 
Does  this  not  teach  true  business  independence,  and  that  the  govern- 
ment ought  to  go  out  of  the  banking  business  and  have  no  rela- 
tion whatever  to  the  banks  of  the  country  further  than  to  put  in 
force  such  regulations  as  may  be  necessary  to  protect  the  people 
against  fraud  and  to  exercise  a  wise  supervision  over  the  whole 
system  ? 

The  redemption  of  bank-notes  should  be  in  gold  only.  To  re- 
deem the  promise  of  the  banks  to  pay  dollars  in  the  promise  of  the 
government  to  pay  dollars,  is  not  to  redeem  in  the  real  dollars  them- 
selves. Nothing  but  redemption  in  gold  dollars  should  be  recog- 
nized as  the  fulfillment  of  the  promise  to  pay.  This  satisfaction  of 
one  promise  to  pay  with  another  promise  to  pay  is  only  another 
illustration  of  the  noxious  influence  of  the  evils  of  the  legal  tenders. 
Indeed,  so  familiar  has  become  the  idea  of  paper  legal-tender 
money,  and  so  demoralized  has  become  the  financial  morality  of 
borne  bankers,  that  they  have  advocated  making  bank-notes  them- 
selves a  legal  tender,  and  permitting  the  bank's  reserves  to  be  held 
in  these  legal  tender  promises.  Is  it  not  time  for  a  clearing  of 
the  financial  atmosphere,  and  For  all  to  demand  that  the  govern- 
ment should  retire  at  once  and  forever  these  vitiating  promises, 
and   again   to   establish   the   Treasury  and  the  banks  on   the  solid 


too  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

foundation  of  gold  coin?  Upon  no  class  of  citizens  does  the  duty 
of  leading  in  this  righteous  movement  devolve  with  the  same  force 
as  upon  the  bankers.  The  imperfection  and  inadequacy  of  the 
National  Banking  Act  is  seriously  experienced  in  times  of  currency 
stringency.  The  banks  are  then  utterly  powerless  to  afford  needed 
relief  at  the  most  critical  period,  and  at  the  very  time  when  a  natural 
system  would  permit  them  to  fulfill  one  of  the  chief  purposes  of 
their  existence. 

In  the  panics  of  i860,  1873,  1884,  1890,  and  1893,  when  finan- 
cial storms  were  sweeping  over  the  country  and  business  houses 
were  toppling  over  by  the  thousand,  the  currency  famine  prevented 
the  banks  from  rendering  the  aid  so  sorely  needed,  and  which  under 
a  less  rigid  system  would  have  been  so  gladly  granted.  The  banks 
of  New  York  and  other  large  cities  saved  their  reserves  and  them- 
selves only  by  issuing  clearing-house  certificates.  These  certificates 
were  simply  natural  currency.  They  had  no  bonds  for  the  security 
of  their  payment.  They  were  secured  only  by  the  assets  of  the 
bank,  the  representatives  of  the  exchangeable  wealth  of  the  country. 
The  certificates  were  without  warrant  of  law,  and  probably  in  vio- 
lation of  law,  but  the  emergency  that  called  them  forth  justified 
their  issue,  and  the  whole  country  ratified  the  action  of  the  banks. 
In  various  parts  of  the  country,  banks,  railroad  companies,  manu- 
facturing concerns,  business  houses,  cities,  and  counties  issued 
paper  that  circulated  as  money,  and  was  accepted  by  the  people 
with  avidity  and  gratitude.  The  amount  of  the  certificates  issued 
by  the  clearing-house  in  1893  in  the  principal  cities  was  upward  of 
seventy  millions  of  dollars. 

If,  then,  there  are  objections  to  the  national  bank  currency,  to 
what  shall  we  turn?  Let  me  present  for  your  consideration  the 
alternative  of  a  "natural  bank  currency."  The  provisions  of  the 
national  banking  act  for  the  regulation  of  banks,  their  critical  super- 
vision by  a  national  officer,  and  the  uniformity  of  note  issue  should 
be  retained,  and  no  plan  dispensing  with  any  of  these  excellent 
features  should  be  considered.  They  must  be  retained  and  improved 
wherever  it  is  possible.  To  illustrate  how  a  natural  currency  origi- 
nates, performs  its  functions,  and  then  retires,  let  us  take  a  quite 
familiar  example — one  no  doubt  you  already  anticipate,  and  par- 
taking somewhat  of  the  character  of  a  kindergarten  example  in 


BANKING  REFORM  AND  CURRENCY  SECTION  197 

banking:  Mr.  A,  a  customer  of  a  bank,  well  known  to  its  officers 
to  be  responsible  for  the  amount  of  a  desired  loan,  proposes  to 
undertake  the  purchase  of  some  of  the  products  of  the  country  in 
which  he  is  carrying  on  his  business.  For  this  purpose  he  offers 
his  note  for  $10,000  for  discount,  which  is  accepted  by  the  bank. 
The  proceeds  of  the  discounted  note  may  be  placed  to  his  credit 
on  the  books  of  the  bank  as  a  deposit,  against  which  he  can  check 
as  his  needs  require,  or  he  may  take  a  cashier's  check,  or  a  cer- 
tificate of  deposit,  or  a  draft  on  some  bank  conveniently  situated. 
But  the  nature  of  his  purchases  does  not  permit  the  use  of  any 
of  these  instruments  of  credit,  and  it  is  necessary  that  he  shall 
pay  the  cash  as  the  purchases  are  made.  In  order  to  do  this,  the 
bank  issues  to  him  its  demand  promissory  notes  in  convenient  de- 
nominations, and  with  these  Mr.  A  proceeds  upon  his  venture.  In 
due  time  the  purchases  are  all  made.  The  situation  then  is  as 
follows:  The  bank  has  Mr.  A's  $10,000  note  in  its  assets;  his 
warehouse  contains  the  valuable  products  the  bank's  accommoda- 
tion has  enabled  him  to  buy,  and  the  parties  from  whom  they  were 
bought  hold  the  promissory  notes  of  the  bank.  In  the  course  of 
business  Mr.  A  disposes  of  his  commodities,  and  receives  for  them 
the  money  that  enables  him  to  pay  his  note  at  the  bank ;  at  the  same 
time,  the  bank-notes  which  he  paid  out  for  his  purchases  find  their 
way  back  through  the  channels  of  business  to  the  bank  for  re- 
demption, and  the  bank,  having  the  money  with  which  Mr.  A  paid 
his  note,  is  enabled  with  it  in  turn  to  redeem  and  retire  the  notes 
it  issued.  The  whole  transaction  thus  becomes  complete.  Mr.  A 
has  enjoyed  the  profit  which  the  bank's  accommodation  has  enabled 
him  to  make ;  the  bank  has  received  the  discount  upon  the  note  and 
the  payment  for  the  use  of  its  instruments  of  credit.  No  purchase 
of  bonds  nor  investments  foreign  to  the  transaction  in  order  to 
effect  it  have  been  required.  Now,  as  the  number  of  these  business 
operations  throughout  the  country  increases  or  diminishes,  so  will 
the  volume  of  the  bank  issues  increase  or  diminish,  accurately 
reflecting  the  prevailing  business  conditions. 

It  seems  to  me  that,  providing  the  bank-notes  issued  in  this 
way  are  certain  of  being  honored  when  presented  for  payment,  the 
system  of  operation  i  have  thus  outlined  is  natural  and  ideal.  For 
their  security  they  have  behind  them  the  liability  of  the  maker  of 


198    PRACTICAL  PRORLEMS  IN  BANKING  AND  CURRENCY 

the  discounted  note,  including  the  merchandise  he  has  bought  with 
its  proceeds,  which  is  a  part  of  the  real  wealth  of  the  country  itself 
and  in  its  most  liquid  form.  As  the  Monetary  Commission  says, 
in  its  report  referring  to  such  security  for  bank-notes:  "If  these 
resources  are  insufficient  security,  they  will  be  insufficient  only  be- 
cause there  would  be  such  a  condition  of  business  paralysis  that 
government,  municipal,  and  railway  bonds  would  be  valueless." 
The  Monetary  Commission,  in  its  report,  however,  proposes  as 
further  security  for  the  payment  of  bank-notes  that  each  bank  shall 
deposit  with  the  United  States  Treasury  a  redemption  fund  of  5 
per  cent,  of  its  outstanding  circulation,  and  in  addition  the  notes 
to  be  a  first  lien  on  all  assets  of  the  bank,  including  the  liability 
of  shareholders.  It  is  an  essential  requisite  of  anv  system  of  bank- 
note circulation  that  the  notes  should  be  absolutely  certain  of  pay- 
ment when  presented  to  the  issuing  bank  or  its  redemption  agency, 
and  that  the  notes  should  circulate  with  unquestioned  confidence 
everywhere  in  the  land. 

It  is  believed  that  the  plan  recommended  by  the  Monetary  Com- 
mission for  the  establishment  of  a  guaranty  fund  will  secure  these 
two  necessary  attributes.  The  recommendation  of  the  commission 
for  a  guaranty  fund  is  not  original,  but  was  suggested  by  the  suc- 
cessful experience  of  banking  systems  in  the  states,  before  the  Civil 
War,  and  in  other  countries. 

In  1829  the  so-called  "Bank  Fund"  was  established  in  the  state 
of  New  York.  This  fund  was  created  by  an  annual  tax  by  the  state 
on  each  note-issuing  bank,  of  ^4  of  1  per  cent,  of  its  capital  stock, 
to  be  accumulated  until  it  was  equal  to  3  per  cent,  of  the  stock. 
This  fund,  however,  was  then  intended  as  a  guaranty  for  both  de- 
posits and  circulating  notes.  The  act  was  subsequently  modified  in 
some  particulars.  The  fund  was  in  existence  eight  years  before 
the  failure  of  any  bank  caused  it  to  be  drawn  upon.  It  was  not 
until  1842  that  experience  proved  the  inadequacy  of  the  fund  for  the 
safety  of  both  notes  and  deposits,  and  in  that  year  an  act  provided 
that  the  fund  should  be  used  only  for  the  redemption  of  notes  of 
failed  banks.  An  examination  of  the  facts  shows  that  if  the  Bank 
Fund  had  been  made  applicable,  from  the  beginning,  only  to  the 
notes,  and  the  notes  made  a  first  lien  upon  all  the  bank  assets,  as 
they  were  by  the  constitution  of   New  York  itself  in   1846,  and 


BANKING  REFORM  AND  CURRENCY  SECTION 


199 


earlier  by  the  state  of  Connecticut,  and  with  a  provision  regulating 
the  amount  and  method  of  their  issue,  the  Bank  Fund  would  not 
have  been  one-half  exhausted.  The  experience  of  New  York  under 
this  system,  including  the  speculative  years  from  1835  to  1839, 
shows  that  the  total  loss  from  circulating  notes,  if  the  system  had 
been  established  in  its  finally  perfected  form,  would  have  been  met 
by  an  assessment  of  less  than  one-tenth  of  1  per  cent,  upon  the 
capital  of  the  issuing  banks.  Other  applications  of  the  principle  of 
the  guaranty  fund  in  the  United  States  are  to  be  found  in  the  state- 
bank  sysem  of  Ohio  and  Iowa,  which  appear  to  have  given  entire 
satisfaction.  When  the  plan  for  a  guaranty  fund  was  proposed  in 
the  state  of  New  York,  in  1829,  Mr.  Van  Buren,  then  governor  of 
the  state,  referred  it  to  Mr.  Olcott,  cashier  of  the  Mechanics'  & 
Farmers'  Bank  of  Albany,  for  his  opinion.  He  "discovered  that 
cautions  and  careful  banking  companies  never  would  consent  to 
make  themselves  liable  for  the  performance  of  contracts  of  the 
various  banks  scattered  over  the  great  state  from  Long  Island  to 
Lake  Erie,"  and  "yet,  it  is  to  his  skill  and  sagacity,  aided  by  a  few 
other  intelligent  and  patriotic  bankers,  that  the  New  York  public  are 
indebted  for  the  most  perfect  system  of  chartered  banking  which 
ever  was  invented."  Hon.  Millard  Fillmore,  afterward  President 
of  the  United  States,  and  then  comptroller  of  the  state  of  New 
York,  reported,  in  1848,  that  "it  is  apparent  that  the  safety  fund 
would  have  proved  ample  indemnity  to  the  bill-holder,  had  it  not 
been  applied  to  the  payment  of  other  debts  of  the  banks  than  those 
due  for  circulation ;"  and  Mr.  L.  Carroll  Root,  an  authority  on 
financial  questions,  states : 

As  the  result  of  calculation  from  experience  of  thirty-six  years — from  1829  to 
1865 — that  had  the  safety  fund  system  been  left  untouched  as  that  upon  which 
New  York  state  bank  currency  was  based,  not  merely  would  every  dollar 
of  circulation  have  been  kept  good,  but  the  total  assessment  to  keep  the  fund 
good  would  have  averaged  less  than  one-fourth  of  1  per  cent,  on  the  banking 
capital,  or  about  three-eights  per  cent,  on  the  average  circulation  outstanding. 

Applying  the  principle  of  the  guaranty  fund  to  the  experience 
of  the  national  bank  circulation,  Mr.  Conant,  a  careful  writer,  says: 

The  following  result  has  been  reached:  The  average  circulation  of  the 
national  banks  from  1864  to  1800  was  about  $277,000,000.  The  circulati  n 
of  the  national  banks  placed  in  the  hands  of  receivers  during  this  time 
was    $21,328,197.      Calculations    by    Comptroller     Dawes    showi   I 


200     PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

average  dividend  of  the  failed  banks  on  their  general  liabilities  were  about 
74  per  cent.  If  the  $21,328,197  bank-notes  had  not  been  secured  by  bonds, 
but  had  shared  ratably  with  the  general  liabilities,  the  proportion  of  the 
note  issues  that  would  have  fallen  as  a  loss  on  the  guaranty  fund  would 
have  been  about  $5,000,000,  or  an  annual  average  of  $158,000  for  the  thirty- 
five  years  from  1864  to  1899.  A  tax  of  one-half  of  1  per  cent,  upon  the  aver- 
age circulation  for  this  time  would  have  brought  into  the  fund  $1,385,000 
per  year,  or  about  eight  times  the  average  annual  loss.  The  total  collections 
for  the  thirty-five  years  would  have  created  a  fund  of  nearly  $49,000,000; 
deducting  the  computed  loss  for  the  same  period,  a  remainder  of  nearly 
$43,000,000  would  have  been  left  in  the  fund. 

An  average  tax  of  one-fifth  of  1  per  cent,  on  the  total  circulation 
for  thirty  years  would  have  covered  all  the  notes  of  all  the  failed 
banks. 

Statistics  like  these  are  an  unanswerable  argument  for  the  abso- 
lute protection  such  a  guaranty  fund  would  afford  to  circulating 
notes,  and  the  inviting  profit  the  banks  would  enjoy,  through  the 
privilege  of  such  issues,  warrants  their  acceptance  of  such  a  system. 

The  system  to-day  is  in  most  satisfactory  operation  in  the  Domin- 
ion of  Canada.  Its  success  there  invites  the  thorough  study  of  all 
intelligent  bankers.  The  experience  of  the  bankers  and  the  people 
of  Canada,  both  the  lenders  and  borrowers  of  money,  should  com- 
mend this  natural  and  independent  method  of  banking  as  well 
worthy  of  the  adoption  and  confidence  of  the  commercial  world. 

The  objection  frequently  expressed  to  making  the  notes  a  first 
lien  on  the  assets  of  the  bank  and  upon  the  stockholders'  liability,  in 
my  opinion,  is  not  well  founded.  It  is  the  provision  of  the  present 
national  banking  act,  and  while  the  guaranty  fund  suggested  is 
abundantly  ample  to  protect  the  notes,  yet,  in  order  to  give  them 
the  widest  circulation  and  to  secure  the  most  implicit  confidence  of 
the  people,  this  provision,  so  long  existing  as  a  part  of  the  system, 
should  continue  to  be  maintained.  Besides,  as  a  question  of  equity, 
it  seems  clear  to  me  that  bank-notes  in  the  hands  of  involuntary 
holders,  as  they  must  be  in  the  course  of  promiscuous  circulation, 
should  stand  in  a  different  relation  to  the  assets  of  the  banks  from 
the  deposits  of  creditors  who  have  voluntarily  made  the  banks  their 

debtor. 

The  recommendation  of  the  Monetary  Commission  does  not 
make  it  obligatory  upon  all  banks  in  the  system  to  issue  notes  and 
become  contributors  to  the  guaranty  fund.     The  privilege  of  issuing 


BANKING  REFORM  AND  CURRENCY  SECTION  201 

notes  is  made  entirely  voluntary.  If  the  officers  of  any  bank  believe 
it  unadvisable  for  any  reason  to  issue  circulation,  there  is  no  com- 
pulsion to  do  so.  The  bank  may  be  continued  without  circulation, 
as  is  the  case  with  many  of  the  national  banks  under  the  present 
system.     A  writer  of  distinction  has  well  said : 

The  issue  of  bank-notes  upon  business  assets  is  the  natural  and  scientific 
theory  of  banking,  because  the  circulating  medium  is  the  instrument  of 
business  transactions,  and  should  be  developed  out  of  them  and  governed 
by  them.  A  system  of  note  issues  upon  business  assets  is  self-regulating, 
under  requirements  for  prompt  redemption  in  gold,  because  the  notes  promptly 
return  to  the  issuing  bank  for  retirement  when  the  quantity  in  circulation 
becomes  excessive. 

If,  then,  it  can  be  shown  that  banks  may  issue  their  circulating 
notes,  based  upon  a  guaranty  fund,  making  them  certain  of  payment 
and  of  universal  acceptance,  why  should  not  such  a  plan  be  adopted? 
The  connection  between  the  banks  and  the  government,  excepting 
supervision,  would  be  at  an  end.  It  would  then  make  no  difference 
to  the  banks,  so  far  as  circulation  is  concerned,  whether  government 
bonds  were  paid  off  or  not ;  or  whether  they  were  paid  in  green- 
backs, silver,  or  gold ;  neither  would  the  circulation  be  affected  by 
the  political  operations  of  the  government,  nor  the  market  price  of 
bonds.  The  business  activities  of  the  country  would  have  free  play, 
and  their  expansion  and  contraction  would  be  faithfully  assisted 
and  reflected  in  the  business  of  the  banks,  irrespective  of  govern- 
ment operations. 

The  State  Bank  of  Indiana,  and  its  branches,  with  Hugh 
McCullough  as  president,  is  a  towering  monument  of  the  most  suc- 
cessful banking.  From  1834  to  1866  it  prospered  and  brought 
ample  rewards  to  its  stockholders,  and  through  its  wise  policy  con- 
tributed greatly  to  the  development  of  the  state  of  Indiana.  "In 
the  panic  which  came  in  the  autumn  of  1857,"  says  Mr.  McCullough, 
"all  the  eastern  banks,  except  the  Chemical  of  New  York,  and  all 
the  western  banks,  except  the  Kentucky  banks  and  the  Bank  of  the 
State  of  Indiana,  suspended  specie  payment." 

The  banks  of  New  England,  under  the  Suffolk  Bank  system, 
afford  a  most  notable  illustration  of  the  application  of  right  bank- 
ing principles  to  circulation.  Under  an  arrangement  entered  into 
between  the  banks  in  the  New  England  states  and  the  Suffolk  Bank 
of  Boston,  it  became  what  we  may  term  a  general  comptroller  for 


202    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

them  all.  It  held  an  agreed  sum  from  each  as  a  guaranty  fund,  and 
in  consideration  redeemed  their  notes  in  Boston  in  specie,  charging 
each  hank  with  its  redeemed  notes,  and  returning  them  at  stated 
intervals.  Under  this  system  of  redemption  it  was  impossible  for 
the  banks  to  force  an  unnatural  and  undue  amount  of  notes  into  cir- 
culation. The  result  was  that  the  whole  volume  of  the  notes  of  the 
New  England  banks  was  redeemed  eight  times  in  a  year,  whereas 
the  volume  of  national  bank  notes  is  now  redeemed  about  once  in 
every  two  years. 

Considering  how  deficient  the  state  laws  were  in  many  respects 
before  the  establishment  of  the  national  system  in  regard  to  super- 
vision and  regulation  of  banks  and  of  their  note  issue,  the  manage- 
ment of  the  state  banks  of  Ohio,  Indiana,  Kentucky,  and  others 
commends  itself  to  our  admiration. 

Usually  when  anything  is  proposed  for  the  security  of  bank-note 
circulation,  excepting  United  States  bonds,  the  cry  is  raised  at  once 
of  "wild-cat"  banking,  as  though  in  abandoning  a  bond-secured  cir- 
culation all  protection  and  safeguards  were  lost.  Since  the  "wild- 
cat" days,  banking,  like  everything  else,  has  gone  through  a  process 
in  many  respects  of  great  development.  National  regulation  and 
supervision  have  been  established ;  railroads  and  telegraphs  have 
made  the  remotest  parts  of  the  country  immediately  accessible ;  the 
scrutiny  of  banks  of  each  other  is  more  careful  and  critical,  and  the 
methods  of  business  are  more  exact,  so  that  it  would  not  be  possible 
for  many  of  the  banking  conditions  that  prevailed  before  the  Civil 
War  to  flourish  again.  But  there  were  banks  in  the  country,  as 
already  shown,  even  in  the  so-called  "wild-cat"  days  before  the 
Civil  War,  whose  history  remains  to  teach  us  of  the  wisdom,  the 
ability,  and  the  honesty  of  their  managers.  All  wisdom  and  ability 
and  honesty  necessary  for  successful  bank  management  were  not 
born  with  this  generation,  and  will  probably  not  die  with  it. 

The  worst,  the  most  disastrous  illustrations  of  "wild-cat"  bank- 
ing were  under  the  laws  of  states  where  the  circulating  notes  were 
secured  by  the  deposit  of  state  bonds  and  stocks.  Many  of  the 
older  persons  present  to-day  doubtless  remember,  possibly  with  sor- 
row and  certainly  with  shame,  the  experience  we  had  in  our  own 
state  of  Minnesota  with  banking  on  our  state  bonds  as  security  for 
circulation.     Only  loss  and  dishonor  remain  of  that  unfortunate  era. 


BANKING  REFORM  AND  CURRENCY  SECTION  203 

The  same  woeful  tale  of  disaster  and  loss  was  experienced  with 
the  bond-secured  banks  of  the  states  of  Michigan,  Indiana,  Illinois, 
and  Wisconsin.  It  was  the  recollection  of  the  fate  of  the  system 
in  these  states  that  led  the  New  York  bankers  to  look  with  suspicion 
upon  its  introduction  into  the  National  Bank  Act  when  it  was  pro- 
posed. 

The  policy  of  issuing  circulating  notes  based  on  business  assets 
has  been  that  of  the  leading  banks  of  foreign  countries  for  many 
years.  The  Bank  of  England  may  be  considered  an  exception.  The 
notes  of  the  issuing  department  of  that  bank  are  fixed  in  amount  by 
the  act  of  1844,  and  secured  in  part  by  a  pledge  of  the  public  debt, 
and  coin  for  all  amounts  exceeding  this  sum  of  debt.  But  this 
exception  only  seems  to  prove  the  rule ;  for,  in  the  panics  of  1847, 
1857,  1866,  and  1890,  the  bank  had  no  legal  means  of  increasing  its 
issue  of  notes.  The  only  way  in  those  crises  of  averting  certain 
ruin  to  all  financial  interests  was  by  transferring  to  the  issue  depart- 
ment an  amount  of  its  government  securities  and  obtaining  an  issue 
of  notes  against  them,  which  then  enabled  the  bank  to  discount  com- 
mercial paper  and  relieve  the  tension.  This  violation  of  the  act  of 
1844  by  the  bank  was  condoned  and  justified  by  the  government  on 
each  occasion. 

The  Bank  of  France— a  creation  of  the  great  Napoleon— the 
Bank  of  Austria,  the  Imperial  Bank  of  Germany,  the  Austro-Hun- 
garian  Bank,  the  Bank  of  Belgium,  the  Bank  of  the  Netherlands, 
the  Bank  of  Scotland,  the  Canadian  banks,  and  many  others,  all 
issue  their  circulating  notes  upon  their  business  assets.  The  issues 
of  some  of  these  banks  are  qualified  by  law  by  a  specie  reserve,  not- 
ably the  German  bank — a  provision  found  in  many  of  the  state  acts 
before  the  war,  and  in  the  national  act,  as  originally  passed. 

It  is  no  reply  to  the  argument  drawn  from  the  successful 
history  of  the  banks  referred  to,  to  say  that  the  conditions  in  the 
United  States  are  different  from  those  of  other  countries,  and  do 
not  admit  of  the  application  of  the  same  principles.  To  that  may  be 
said  tbat  economic  and  financial  principles  are  as  invariable  and 
universal  as  the  law  of  gravity.  Principles  and  methods  are  applic- 
able, without  exception,  to  all  civilized  commercial  conditions,  and, 
in  my  opinion,  to  no  place  more  than  our  own  country. 

In  closing  this  paper,  will  you  indulge  me  while  I  sc^k  to  repre- 


204  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

sent  very  briefly  the  influence  of  the  sub-treasury  upon  the  currency 
question ;  for  there  can  be  no  consideration  of  the  question  that  does 
not  take  the  United  States  Treasury  into  account. 

If  the  Treasury  were  conducted  as  that  part  of  a  business  organ- 
ization is  used  in  ordinary  commercial  affairs — simply  to  receive  the 
funds  due  the  government,  to  deposit  them  in  banks,  and  check  them 
out  in  payment  of  indebtedness  and  current  expenses — it  would 
require  no  more  attention  in  considering  financial  questions  than 
does  the  Treasury  of  the  Standard  Oil  Company,  the  United  States 
Steel  Company,  the  Pennsylvania  Railroad,  or  any  other  of  the  huge 
business  undertakings  with  which  we  are  so  familiar  in  these  later 
days.  That  the  government  does  not  do  so  cannot  be  because  of  the 
magnitude  of  its  business ;  for  the  operations  of  some  of  the  largest 
corporations  named  very  closely  approach  those  of  the  government 
itself. 

During  the  administration  of  President  Polk,  in  1846,  the  sub- 
treasury  was  established.  It  is  not  now  necessary  to  discuss  the 
reasons  why  this  was  done.  Since  that  time  all  the  money  of  the 
government  received  from  customs  and  loans  has  been  kept  in  the 
vaults  of  the  Treasury  Department.  Other  receipts,  such  as  excises, 
taxes,  etc.,  have  been  deposited  in  national  banks,  with  United  States 
bonds  as  security,  and  have  been  subject  to  check  and  draft,  the  same 
as  any  commercial  deposit. 

The  withdrawal  of  a  large  part  of  the  people's  money  and  its 
retention  by  the  Treasury,  apart  from  the  current  money  of  the  coun- 
try, deprives  the  people  of  its  use,  and  is  often  more  or  less  disturb- 
ing to  business.  The  evil  of  the  practice  is  so  well  recognized  by 
Congress  that  it  has  been  made  a  punishable  offense  by  statute  to 
lock  up  money,  and  to  do  just  what  the  law  requires  the  Treasurer 
to  do  under  the  Subtreasury  Act. 

The  subtreasury  system  is  a  revival  of  primeval  times,  when  the 
money  of  the  sovereign  was  kept  for  safety  in  his  own  chest.  No 
other  civilized  nation  in  the  world  treats  the  money  it  collects  from 
its  people  in  this  way.  All  other  governments  deposit  their  funds 
in  the  banks  of  the  country,  where  they  are  subject  to  the  use  of 
business,  just  as  the  money  of  any  of  their  citizens. 

If  the  principle  is  right,  and  the  only  way  for  government  money 
to  be  kept  safely  is  to  lock  it  up,  as  the  Subtreasury  Act  requires, 


BANKING  REFORM  AND  CURRENCY  SECTION  205 

why  should  any  money  be  deposited  in  banks?  Let  the  state  of 
Minnesota  do  as  the  United  States  does,  and  instead  of  depositing 
its  cash  on  hand  in  the  various  banks  of  the  state,  as  it  now  does, 
lock  it  up  securely  in  its  own  vaults  in  the  state  capitol;  let  every 
county  and  city  in  the  state  do  the  same  thing,  and  every  railroad 
and  business  house  build  its  burglar  and  fire-proof  vaults  and  lock 
up  their  funds.  If  the  government  is  right,  why  should  anyone 
deposit  in  banks?  If  the  government  itself  is  so  distrustful,  why 
should  anyone  have  confidence  in  the  banks?  The  absurdity  of  the 
whole  proceeding  is  too  apparent.  Such  a  policy  would  be 
destructive  of  all  business,  and  commerce  would  come  to  a  stand- 
still, if  generally  adopted. 

If  the  sum  shown  by  the  last  Treasury  statement  to  be  in  the 
subtreasury  was  all  deposited  in  the  banks,  under  proper  safeguards, 
and  used  by  the  banks  as  other  deposits,  the  loaning  ability  of  the 
banks  would  be  increased  hundreds  of  millions  of  dollars,  estimated 
upon  the  average  reserve  of  the  banks  throughout  the  country. 

In  striving,  then,  to  devise  a  system  of  note  circulation  that  shall 
be  safe,  flexible,  and  universally  acceptable,  the  whole  system  of 
government  financiering  ought  to  be  revised  and  corrected.  The 
independent  Treasury  should  be  abolished ;  a  plan  then  adopted  that 
will  not  permit  the  treasury  to  withdraw  hundreds  of  millions  of 
dollars  from  the  channels  of  trade,  and  when  an  accumulating 
balance  is  to  be  disposed  of — either  by  the  buying  of  bonds  or  "in 
relieving  the  market" — to  subject  the  whole  financial  situation  to  the 
judgment  of  the  Secretary,  whose  action  may  most  profoundly  affect 
the  business  interests  of  the  whole  country. 


THE  MEDIUM  OF  EXCHANGE  AND  THE  BANKING 

FUNCTION 

ADDRESS  DELIVERED  BY  A.  P..  STICKNF.Y,  PRESIDENT  OF  TnE  CHICAGO  GREAT  WESTERN 
RAILWAY  COMPANY,  BEFORE  THE  AMERICAN  CANKERS'  ASSOCIATION,  AT  MIL- 
WAUKEE IN   OCTOBER,   1 90 1. 

The  medium  of  exchange  is  an  essential  pari  of  commerce  as 
distinguished   from  barter.     The  ultimate  purpose  of  all  commerce 

is — to    use   the   unique    and    rather    satisfactory    expression   of   the 


I  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

present  Secretary  of  the  Treasury — "to  exchange  things  for  things." 
When  "things"  are  exchanged  for  money,  the  process  is  only  half 
done.  Whatever  is  willingly  accepted  to  represent  "things"  during 
the  process  of  the  suspended  exchange  is  a  medium  of  exchange. 

The  usual  statement  that  money  is  the  medium  of  exchange  is 
but  a  fraction  of  the  fact.  The  word  "money"  is  constantly  mis- 
used. In  common  parlance,  money  is  synonymous  with  wealth  and 
capital.  It  is  said  of  certain  men  that  they  have  "lots  of  money," 
meaning  that  they  possess  great  wealth;  again,  that  certain  mer- 
chants have  "large  amounts  of  money,"  meaning  that  they  have 
large  capital ;  while  the  fact  is  that  rich  men  and  great  merchants 
have  very  little  money.  It  is  probably  no  exaggeration  to  say  that 
the  average  poor  man  possesses  more  money  than  the  average  rich 
man. 

But  it  may  be  said  that  this  is  a  mere  play  upon  words — that 
the  rich  men  do  not  carry  their  money  in  their  pockets,  but  have 
money  on  deposit  in  banks.  This  proposition  presents  another  pop- 
ular misuse  of  the  word  "money."  No  man  has  money  in  the  bank. 
A  credit  on  a  bank  ledger  is  not  money — it  is  simply  an  evidence 
of  the  bank's  indebtedness,  which  may  or  may  not  be  redeemed,  like 
any  other  indebtedness.  Whatever  money  a  bank  may  possess 
(which  is  always  less  than  its  deposits)  belongs  to  the  bank. 

The  most  which  can  be  said  about  money  as  a  medium  of 
exchange  is  that  it  may  be  used  as  such ;  but,  as  a  matter  of  fact,  it 
is  seldom,  practically  never,  used  as  a  medium  of  exchange  except 
in  petty  transactions. 

Stating  the  fact  affirmatively,  the  medium  of  exchange  in  some 
petty  transactions  is  money,  and  in  many  petty,  and  in  all  the  larger, 
transactions  it  is  credit.  Legitimate  credits  for  use  as  a  medium 
of  exchange  are  produced  by  buying  for  the  purpose  of  selling,  and 
they  are  extinguished  by  buying  for  the  purpose  of  consumption. 
In  short,  their  creation  has  reference  to  production,  and  their  extinc- 
tion to  consumption.  Such  credits  expand  as  production  and  com- 
merce expand,  and  contract  as  production  and  commerce  contract. 
The  merchant  who  creates  a  credit  deposits  it  in  his  bank  and  uses 
it  first ;  then  it  is  transferred  by  check  time  after  time,  effecting 
exchange  after  exchange,  until  it  is  finally  redeemed.  The  inter- 
mediate   exchanges   arc    said   to   be   made   with   cash.     Therefore, 


BANKING  REFORM  AND  CURRENCY  SECTION  207 

while  it  is  true  that  all  the  larger  transactions  of  commerce  are 
effected  with  credit  as  the  medium  of  exchange,  it  does  not  follow 
that  all  merchants  go  in  debt  for  their  purchases.  The  few  mer- 
chants who  do  not  go  in  debt  use  credits  which  have  been  created 
by  others. 

The  modern  commercial  bank  is  a  most  useful  institution,  but 
it  has  no  independent  function.  It  is  a  co-worker  with  the  merchant. 
The  merchant  function  is  primary — the  bank  function  is  secondary. 
Trading  is  the  foundation,  and  without  the  trader  there  could  be  no 
banking  function.  The  merchant  creates  the  credit — the  bank 
fructifies  it  and  makes  it  available  as  a  medium  of  exchange.  The 
bank  is  also  the  clearing-house  of  traders.  It  clears  the  trades  of 
its  customers  by  offsetting  indebtedness,  using  but  very  little  money. 

The  bank  is  a  credit,  instead  of  a  money,  institution.  It  deals 
in  credits.  The  bulk  of  its  assets  consists  of  evidences  of  indebted- 
ness, and  the  bank  is  itself  the  largest  debtor,  relative  to  its  capital, 
in  the  business  world.  In  short,  everybody  owes  the  bank,  and  the 
bank  owes  everybody,  and  there  is  little  about  the  bank  or  its  func- 
tion which  does  not  smack  of  indebtedness. 

There  are  many  misconceptions  of  the  banking  function,  grow- 
ing out  of  the  technical  but  unnatural  meaning  which,  in  banking 
parlance,  is  given  to  the  words  "deposit"  and  "borrow."  When  the 
public  is  told  that  the  bank  deposits  have  increased  a  billion  and  five 
hundred  million  of  dollars  since  the  panic,  it  is  regarded  as  evidence 
of  an  enormous  increase  of  money.  But  in  fact  it  means  little  more 
than  that  the  conditions  of  trade  are  such  that  merchants  have 
increased  their  indebtedness,  which  indebtedness  has  been  exchanged 
for  bank  credits,  and  by  this  means  the  indebtedness  of  the  banks 
has  been  increased.  It  is  an  increase  of  indebtedness  which  is 
available  as  a  medium  of  exchange,  instead  of  an  increase  of 
money.  There  has  been  but  a  comparatively  slight  increase  of 
money.  During  the  period  in  which  the  so-called  deposits  of  the 
national  banks  have  increased  $1,500,000,000,  the  money  in  the 
banks  has  increased  only  "$207,000,000. 

Regarding  the  banks  as  money  institutions,  in  connection  with 
the  use  of  the  words  "deposit"  and  "borrowing,"  confuses  the  mind 
as  to  the  real  nature  of  the  so-called  deposits  and  borrowings.  It 
is  the  general  understanding  that  the  sequence  of  the  banking  busi- 


208    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

ness  is  first  a  deposit,  then  a  loan,  and  therefore  the  bank's  so-called 
loans  are  limited  by  the  amount  of  the  so-called  deposits. 

Let  us  examine  these  apparently  self-evident,  but,  in  fact,  false 
propositions,  in  connection  with  an  ordinary  so-called  borrowing. 
Suppose  I  borrow  in  the  usual  way  $100,000  from  a  bank.  The 
transaction  would  increase  the  bank's  deposits  $100,000,  not  before, 
but  at  the  same  instant  of  the  loaning,  and  although  it  would  increase 
the  bank's  deposits  $100,000,  it  would  be  no  evidence  of  an  increase 
of  wealth  in  the  form  of  money  or  otherwise. 

After  I  had  borrowed  the  $100,000,  the  bank  would  have  no 
less  money  and  I  should  have  no  more  money.  I  should  have  only 
a  credit  of  $100,000  on  the  bank  ledger.  It  was  not  a  borrowing 
of  money,  but  a  swapping  of  credits.  I  have  traded  my  note  as 
evidence  of  my  indebtedness  to  the  bank,  in  exchange  for  a  book 
entry  as  evidence  of  the  bank's  indebtedness  to  me.  It  is  true  I 
may  transfer  the  indebtedness  of  the  bank  by  check  (which  is  mis- 
called drawing  the  money  from  the  bank),  but  in  that  case  my 
check  will  be  deposited  in  the  same  or  some  other  bank,  and  that 
$100,000  note  would  remain  a  part  of  the  so-called  deposits  of  the 
banks,  either  in  the  original  or  in  some  other  bank,  until  it  was 
finally  redeemed. 

In  this  case  the  bank  increased  its  deposits  by  increasing  its 
loans,  and  if  the  deposits  of  all  the  banks  be  considered  as  a  whole, 
it  will  be  found  that  the  deposits  increase  when  the  loans  increase. 
The  deposits,  in  the  main,  are  produced  by  the  so-called  loans. 

The  fact  is  that  in  most  of  the  bank  transactions  there  is  no  bor- 
rowing, or  lending,  or  depositing.  They  are  simply  credit  transac- 
tions, a  swapping  of  credits,  which  in  the  matter  of  bookkeeping 
increases  both  the  so-called  deposits  and  the  so-called  loans  in  the 
same  amount  and  at  the  same  time.  Practically  all  the  so-called 
deposits  are  made  by  swapping  the  bank's  credit  for  other  credits,  in 
the  form  of  promissory  notes,  checks,  drafts,  etc.  There  are  small 
streams  of  money  flowing  in  and  out,  but  the  incomings  and  out- 
goings are  so  nearly  equal  that  a  writer  has  said :  "A  bank's  cash 
resembles  a  column  of  gold  with  a  slight  ripple  on  the  surface." 

In  this  country  the  greatest  ripple  on  the  surface  of  the  reserve 
is  produced  by  the  daily  clearances.  With  a  properly  organized 
system  of  banking  no  money  whatever  would  be  required.     The 


BANKING  REFORM  AND  CURRENCY  SECTION  209 

daily  balances  at  the  London  Clearing  House  are  settled  without  the 
use  of  a  penny  of  money. 

Swapping  credits  is  the  function  of  the  modern  commercial 
bank.  Its  business  consists  in  scrutinizing  individual  credits  and 
in  giving  its  own  credit  in  exchange  for  such  individual  credits  as 
are  acceptable,  and  thus  furnishing  an  abundant  supply  of  the 
medium  of  exchange  of  commerce.  To  regard  the  bank  as  a  mere 
money-lender  is  to  belittle  its  important  and  useful  function. 

In  this  connection  I  want  to  say  that  I  like  the  word  "swapping," 
because  it  expresses  my  exact  meaning,  and  even  boys  know  what 
it  means.  The  boys  swap  jack-knives  and  swap  marbles.  The 
banks  swap  credits. 

Having  stated,  as  clearly  as  my  ability  permits,  the  nature  of  the 
banking  function,  I  shall  now  venture  to  speak  of  some  of  the  dif- 
ficulties, owing  to  the  restriction  of  the  laws,  of  a  proper  exercise  of 
the  banking  function  during  commercial  crises.  To  present  my 
propositions  clearly,  I  must  repeat  that  the  creation  of  commercial 
credits  has  relation  to  production,  and  their  extinction  to  consump- 
tion, and  there  is  always  a  lapse  of  time  between  production  and  con- 
sumption. As  consumption  cannot  be  unnaturally  accelerated,  and 
as  the  medium  of  exchange  once  issued  cannot  be  ultimately 
redeemed  until  products  are  demanded  for  consumption,  a  vast 
volume  of  such  currency  must  be  always  outstanding,  and  as  pro- 
duction and  consumption  are  continuous  processes,  the  function  of 
the  bank  is  also  continuous. 

The  bank,  therefore,  which  fails  continuously  to  exercise  its 
function  of  swapping  credits  fails  to  perform  its  part  and  its  duty, 
and  does  incalculable  mischief,  because  the  normal  value  of  products 
can  be  maintained  only  by  the  merchants,  with  the  assistance  of  the 
banks,  carrying  them  with  a  steady  hand  until  they  are  required  for 
consumption. 

When  the  banks,  from  whatever  cause,  refuse  to  perform  their 
part  by  refusing  to  swap  credits  with  the  merchants,  the  merchants 
arc  compelled  to  stop  buying  and  vainly  to  attempt  to  force  their 
stocks  upon  the  consumers  by  lowering  prices.  Such  attempts 
must  always  be  futile,  because  the  consumption  which  produces  the 
ultimate  redemption  of  credits  is  necessarily  a  uniform  hand-to- 
mouth  process.  The  merchants  who  do  it  early  may  unload  upon 
14 


210     PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

less  foreseeing  merchants,  but  passing-  merchandise  from  one  mer- 
chant to  another  does  not  reduce  the  volume  of  credits.  It  only 
affects  the  individual  merchant,  and  perhaps  his  individual  bank, 
by  transferring  the  burdens  to  other  merchants  and  other  banks. 
But  the  futile  attempts  once  commenced  in  a  large  way  force  values 
lower  and  lower,  until  some  of  the  merchants  and  producers  are 
ruined.  When  some  of  the  merchants  and  producers  are  thus 
ruined,  some  of  the  laborers  are  deprived  of  employment.  When 
seme  of  the  laborers  are  unemployed,  their  ability  to  consume  is 
curtailed,  which  still  further  reduces  the  demand,  which  still  further 
reduces  values,  ruins  still  other  merchants  and  producers,  deprives 
more  laborers  of  employment,  which  still  further  reduces  consump- 
tion and  values,  and  ruins  still  other  merchants  and  producers,  and 
finally  ruins  many  of  the  banks  themselves. 

Probably  a  majority  of  bank  managers,  who  have  not  given  the 
subject  special  consideration,  believe  that  the  withdrawal  of  balances 
try  customers  compels  the  banks   to   restrict   their  loaning   during 
commercial  crises,  and  that  many  withdraw  money  which  they  keep 
in  safe-deposit  vaults.     While  it  is  a  well-known  fact  that  a  few 
withdraw  money  from  the  banks  in  times  of  panic  for  the  purpose 
(5f  holding  it  in  their  own  possession,  an  examination  of  the  accounts 
of  the  national  banks,  as  compiled  by  the  Comptroller  of  the  Cur- 
rency, is  convincing  that   in  the   panic  of   1893   such   withdrawals 
were  inconsiderable ;  in  fact,  less  than  the  hard  times  forced  out  of 
the  pocket  money  of  the  people  into  the  banks.     Otherwise,  at  the 
pinch  of  the  panic,  there  would  have  been  less  money  in  the  banks 
fiian  before  the  panic  commenced.      But  the  Comptroller's  statistics 
show  the  astonishing  fact  that  at  the  pinch  of  the  panic,  when  the  so- 
called  deposits  had  decreased  $314,000,000  and  had  reached  their 
lowest  point,  the  national  banks  possessed  $26,000,000  more  money 
than  in  1892,  when  business  was  brisk  and  the  banks  were  swapping 
credits  more  freely  than  ever  before.     This  would  seem  to  prove 
that  whatever  may  have  been  the  cause  of  the  panic,  it  was  not  a 
shortage  of  money  in  the  banks,  and  that  it  is  a  mistake  to  suppose 
that  the  difficulties  of  the  banks  during  the  panic  years  were  due  to 
withdrawals  of  money  for  the  purpose  of  hoarding.     The  enormous 
decrease  in  so-called  deposits  was  about  equal  to  the  decrease  of 
the  so-called  loans,  and  was  due  to  the  refusal  of  the  banks  to  con- 


BANKING  REFORM  AND  CURRENCY  SECTION  21 1 

tinue  swapping  credits.  The  difference  between  the  decrease  of 
deposits  and  the  decrease  of  loans  was  only  $13,000,000 — less  than 
4  per  cent. 

While  I  am  prepared  to  repeat  and  stand  by  the  statement  that 
the  reason  of  the  enormous  contraction  of  the  available  medium  of 
exchange — or,  in  other  words,  the  enormous  decrease  in  so-called 
deposits  and  the  consequent  destruction  of  normal  values,  followed 
by  bankruptcy  of  merchants  and  distress  of  the  unemployed — was 
the  action  of  the  banks  in  contracting  their  so-called  loans,  I  am  not 
prepared  to  say  that  it  was  the  fault  of  the  banks  or  their  managers. 
That  the  American  bank,  as  at  present  organized,  should  falter  at 
every  minor  commercial  crisis,  and  stop,  as  far  as  possible,  the 
swapping  of  credits  in  a  major  panic,  seems  inevitable.  The 
necessity  is  due  to  the  lack  of  a  banking  system. 

The  American  system  of  banking  is  often  talked  about;  but,  in 
fact,  there  is  no  system.  The  dictionary  defines  the  word  "system" 
as  meaning  "a  whole  plan  or  scheme  consisting  of  many  parts  con- 
nected in  such  a  manner  as  to  create  a  chain  of  mutual  dependencies 
and  supports."  The  banks  of  this  country  are  not  parts  of  a  whole 
plan  connected  in  such  a  manner  as  to  create  a  chain  of  mutual  sup- 
ports, but  they  are  local  and  independent  institutions.  In  times  of 
commercial  crises  each  must  depend  upon  itself,  and  as  it  is  evident 
that  one  bank,  without  the  co-operation  of  the  other  banks,  cannot 
support  the  enormous  credits  of  a  commercial  nation  like  the  United 
States,  each  begins  to  scramble  to  increase  its  cash  reserve  at  the 
expense  of  the  other  banks — for  where  else  is  the  cash  to  come  from? 
— and  to  reduce  its  liabilities.  Its  isolated  weakness  compels  each 
bank  to  prey  upon  the  other  banks,  and,  to  adopt  David  Harum's 
version  of  the  Golden  Rule,  "do  unto  the  other  banks  what  you  know 
they  will  do  unto  you,  but  do  it  fust."  This  unseemly  scramble 
after  money  to  maintain  reserves  is  never  witnessed  in  any  other 
commercial  nation,  because  all  commercial  nations  except  the  United 
Slates  have  systems  of  banks  so  connected  that  each  bank  consti- 
tutes a  mutual  support  to  each  other  bank.  Practically  all  com- 
mercial nations  except  the  United  States  have  adopted  the  Scotch 
system  of  branch  hanks,  with  a  connecting  link — a  central  bank — 
which  is  the  hank  of  the  banks  and  holds  the  reserves  of  all. 

In  England,  where  this  system  of  banking  has  been  most  highly 


212  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

developed,  the  Bank  of  England  holds  the  gold  reserve  of  all  the 
banks,  and  of  the  nation  itself.  The  reserves  of  the  other  banks  are 
credits  at  the  Bank  of  England.  Under  this  system,  instead  of  all 
the  banks  scrambling  and  competing  with  each  other  for  the  money 
to  maintain  their  individual  reserves,  the  Bank  of  England  alone 
does  the  scrambling  with  no  competition.  Under  this  system,  gold 
which  is  withdrawn  from  any  bank  is  obtained  from  the  Bank  of 
England,  and,  after  circulating  for  a  short  time  in  domestic 
exchanges,  is  returned  in  the  ordinary  course  of  business,  through 
the  same  or  some  other  bank,  to  the  vaults  of  the  Bank  of  England. 
Therefore,  practically  the  sole  leakage  of  reserve  is  for  exportation 
when  the  conditions  of  foreign  exchanges  are  adverse.  The  duty 
of  managing  the  foreign  exchanges  is  delegated  solely  to  the  Bank 
of  England.  England  has  no  treasury — no  nation  except  the 
United  States  has  a  treasury. 

If  you  examine  the  statements  of  the  various  banks  of  England, 
outside  of  the  statement  of  the  Bank  of  England,  you  will  not  find 
among  their  liabilities  any  "indebtedness  to  other  banks,"  which 
constitutes  about  one-half  of  the  liabilities  of  the  banks  in  the 
reserve  cities  of  this  country,  for  the  reason  that  their  country  cor- 
respondents are  but  branches  of  their  own  bank.  This  eliminates 
one  of  the  most  dangerous  features  of  American  banking  in  times 
of  extreme  panics. 

Such  systems  of  banks  can  exercise,  and  have  for  more  than 
half  a  century  exercised,  the  function  of  swapping  credits  with  their 
customers  in  panics  the  same  as  in  booms.  The  repression  exercised 
by  the  banks  during  commercial  crises  is  effected  through  the  inter- 
est rate.  It  was  this  system  which  enabled  the  banks  in  London,  at 
the  time  of  the  Barings'  failure — the  largest  single  commercial  fail- 
ure known  to  history — not  only  to  continue  the  exercise  of  the 
banking  function,  but  to  increase  their  liabilities  $125,000,000  by 
assuming  the  liabilities  of  the  Barings.  In  London  the  bank  rates 
advanced  to  6  per  cent,  for  a  few  days — in  New  York  the  outside 
rate  advanced  to  68  per  cent,  and  the  banks  quit  business  alto- 
gether. 

Now,  it  is  interesting  to  inquire  as  to  the  banking  laws  under 
which  these  systems  are  organized.  I  have  been  unable  to  learn 
that  there  are  any  laws  in  England  or  Scotland  especially  relating 


BANKING  REFORM  AND  CURRENCY  SECTION  213 

to  banks,  except  the  laws  restricting  the  issue  of  bank-notes.  In  all 
respects  the  banks  are  as  free  as  the  merchants.  Banking  corpor- 
ations are  organized  under  the  same  general  acts  as  mercantile, 
manufacturing,  and  other  corporations.  The  American  laws 
require  a  certain  minimum  percentage  of  reserve,  and  compel  the 
banks,  when  that  percentage  is  reached,  to  do  the  very  thing  which 
banks  should  never  do,  viz.,  arbitrarily  suspend  the  exercise  of  the 
banking  function.  This  provision  of  the  law  was  intended  to  be  a 
safeguard,  but  upon  several  occasions  the  observance  of  the  law 
would  have  brought  ruin  upon  all  the  banks.  On  these  occasions 
the  New  York  City  banks  have  boldly  disregarded  the  law  in 
respect  to  the  reserve,  and,  in  defiance  of  the  law,  have  stood 
together  for  a  few  days  as  a  system. 

There  is  no  English  law  requiring  any  reserve  whatever  to  be 
held  against  so-called  deposits.  But  the  Bank  Act  of  1844,  passed 
with  great  public  favor,  names  a  minimum  of  reserve  to  be  held  by 
the  Bank  of  England  against  its  outstanding  notes.  This  minimum- 
reserve  requirement  was  expected  to  correct  everything  which  was 
wrong,  and  especially  it  was  forever  to  prevent  speculations,  bank 
failures,  and  panics.  Like  the  American  law,  it  required  the  bank, 
whenever  that  limit  was  reached,  to  stop  discounting. 

But  history  says  that  within  three  years  the  law,  instead  of  pre- 
venting, produced  every  economic  disturbance  which  it  was  expected 
to  prevent,  including  a  currency  panic.  The  legal  minimum  of  the 
reserve  was  reached,  and,  in  obedience  to  the  law,  the  bank  stopped 
swapping  credits,  and  merchants  who  had  received  loans  were  called 
upon  to  pay,  without  being  permitted  to  renew  them.  The  greatest 
distress  followed.  Merchants  could  pay  the  loans  only  by  selling 
their  merchandise.  London  merchants  are  said  to  have  walked  the 
streets  at  midnight,  offering  their  goods  at  any  price.  Values  dis- 
appeared. Consols  and  exchequer  bills  were  offered  at  enormous 
discounts,  but  could  not  be  sold.  The  most  extravagant  rates  were 
offered  in  vain  for  the  use  of  money. 

Finally,  in  the  midst  of  universal  distress,  on  petitions  signed  by 
tens  of  thousands,  the  very  ministry  which  had  pr<  cured  the  passage 
of  the  law  was  compelled  to  ask  the  bank  to  disregard  the  law.  The 
bank  resumed  swapping  credits,  and  history  recites  that  "in  ten  min- 
utes after  it  was  known  the  panic  was  ended."     Merchants  who  had 


2I4 


PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 


been  clamoring  for  discounts,  as  soon  as  they  could  get  them  did 
not  need  them,  and  the  smart  ones,  who  had  borrowed  early  and 
withdrawn  actual  money,  brought  back  the  gold  which  they  never 
needed  and  begged  to  be  relieved  from  the  payment  of  interest.  An 
instance  is  recited  of  one  firm  returning  two  million  pounds  sterling 
($10,000,000)  gold,  which  it,  foreseeing  the  inevitable,  had  borrowed 
early,  and  begging  the  bank  to  relieve  it  from  the  further  payment 
of  9  per  cent,  interest. 

Again,  in  the  panic  of  1857  the  same  history  was  repeated,  except 
that  the  Ministry  refused  to  act  until  the  total  gold  reserve  in  the 
Bank  of  England  and  its  branches  was  reduced  to  only  358,208 
pounds  sterling — a  trifle  over  $1,700,000.  This  was  practically  the 
total  aggregate  reserve  of  all  the  banks  of  England  at  the  close  of 
business  November  12,  1857.  I  ask  you,  gentlemen,  to  think  for  a 
moment  what  it  would  mean  in  this  country  if  the  aggregate  reserve 
of  all  the  banks  and  the  United  States  Treasury  was  reduced  to 
$1,700,000!  Starting  with  a  total  reserve  of  only  $1,700,000  on  the 
night  of  November  12  (the  day  the  permission  was  given  to  disre- 
gard the  law),  the  bank  made  new  loans — that  is,  swapped  credits — 
besides  renewals,  in  the  sixteen  remaining  days  of  November, 
amounting  to  $36,000,000.  That  is  to  say,  with  only  $1,700,000 
reserve,  the  Bank  of  England  expanded  its  loans  in  eighteen  days 
$36,000,000,  and  its  reserve  increased  day  by  day !  Following  the 
example,  the  other  banks  expanded  their  credits. 

Here  are  facts  well  worth  your  consideration :  When  the  bank 
stopped  loaning,  in  order  to  protect  the  reserve,  the  reserve' 
decreased;  as  soon  as  it  resumed  loaning,  the  reserve  increased. 

A  writer  says : 

This  great  crisis  of  1857,  far  exceeding  in  intensity  that  of  1847,  added 
another  proof  upon  proof  that,  in  a  great  commercial  crisis,  the  restrictive 
practice  will  bring  about  universal  failure  of  merchants  and  bankers,  and 
that  the  expansive  practice  is  the  only  one  which  can  save  both. 

Before  making  further  citations  of  history,  I  desire  to  recur  to 
the  conditions  which  prevailed  in  the  panic  of  1893.  As  I  have  said, 
the  medium  of  exchange  was  reduced  by  the  action  of  the  national 
banks  in  refusing  to  swap  credits,  to  the  extent  of  more  than  three 
hundred  millions  of  dollars.  There  is  no  way  to  tell  how  great  a 
reduction  was  produced  by  the  action  of  the  state  banks  and  the 


BANKING  REFORM  AND  CURRENCY  SECTION  215 

trust  and  other  companies  which  exercise  the  functions  of  commer- 
cial banks.  If  their  reduction  was  the  same  as  that  of  the  national 
banks  (and  there  is  some  evidence  that  this  estimate  would  be  cor- 
rect), the  aggregate  reduction  of  the  medium  of  exchange  was  the 
enormous  amount  of  six  hundred  millions  of  dollars.  This  pro- 
duced an  apparent  shortage  of  money  to  the  same  extent. 

Now,  gentlemen,  if  I  were  to  mention  the  classes  of  property 
which  have  intrinsic  value,  and  which  by  reason  of  their  prime  neces- 
sity should  naturally  maintain  fairly  uniform  and  normal  values,  I 
should  name  the  homes,  which  give  shelter;  the  farms,  which  pro- 
duce food  and  clothing;  the  manufacturing  plants  and  the  ware- 
houses and  buildings  necessary  for  trade.  But  it  is  a  notorious  fact 
that  these  classes  of  property  had  practically  no  market  value  dur- 
ing the  panic,  and  that  every  man  who  had  all  his  savings  invested 
in  equities  in  such  properties,  no  matter  how  large  the  equity,  was 
ruined.  I  should  also  name  the  products  of  the  farms — the  food, 
the  cotton,  and  the  wool — and  the  products  of  the  factories,  as 
property  entitled  to  maintain  a  fairly  uniform  and  normal  valuation, 
approximately  equal  to,  or  exceeding,  the  cost  of  production.  But 
if  I  were  asked  to  name  the  commodity  of  the  most  obvious  intrinsic 
value,  I  should  name  labor,  because  it  is  the  basis  of  all  wealth. 
Yet,  during  the  panic,  the  market  value  of  the  products  of  the  farms 
and  the  factories  was  abnormally  low,  and  it  was  estimated  that 
there  were  more  than  two  million  laborers  in  the  United  States  who 
were  unable  to  sell  their  labor  at  any  price,  and  millions  more  who 
were  compelled  to  sell  their  labor  at  a  reduced  price. 

The  commonly  accepted  explanation  of  these  phenomena  is  that 
market  values  are  governed  by  the  relation  of  supply  to  demand,  and 
that  the  panic  had  been  preceded  by  activity  in  production  to  such 
an  extent  that  there  was  over-production.  It  is  my  contention  that 
the  extraordinary  relation  of  supply  to  demand  was  not  due  to 
over-production,  but  to  under-consumption.  There  was  not  a  min- 
ute during  the  panic  in  which  all  the  homes  of  this  country  would 
not  have  been  in  demand  for  occupation,  and  there  was  no  time 
during  the  panic  in  which  the  products  of  the  farm  and  of  the 
factories  would  not  have  had  their  normal  consumption,  if  all  the 
consumers  of  the  country  had  possessed  the  means  of  obtaining 
them.     The  tivo  million  laborers  who  tramped  the  country,  clothed 


2l6  PRACTICAL  PROBLEMS  IN  RANKING  AND  CURRENCY 

in  rags  and  with  insufficient  food,  liad  capacity  to  consume  every 
tiling  their  labor  would  have  produced,  had  the  captains  of  industry 
been  i>i  position  to  set  them  to  work,  and  thus  the  normal  equilibrium 
bctiveen  supply  and  demand  would  have  been  maintained. 

The  reason  why  the  captains  of  industry  ivcre  not  in  position  to 
set  these  laborers  to  work  was  apparently  the  lack  of  money,  but,  in 
fact,  it  was  the  shortage  of  six  hundred  millions  of  the  medium  of 
exchange,  resulting  from  the  banks'  unduly  restricting  the  function 
of  szvapping  credits. 

There  are  no  classes  of  the  people  so  much  interested  in  the  intro- 
duction of  a  system  of  banking  which  has  capacity  continuously  to 
exercise  the  banking  function,  as  the  debtors  and  laborers. 

These  are  prosperous  days.  The  conditions  of  trade  are  such 
that  the  merchants  and  banks  have  expanded  their  liabilities  beyond 
all  precedents.  It  is  a  period  of  confidence,  in  which  everything 
goes,  and  there  is  no  lack  of  the  medium  of  exchange.  But  I  warn 
you  not  to  believe  that  the  country  has  grown  so  rich  that  there  will 
never  be  another  period  of  distrust.  Substantial  wealth  is  created 
by  the  slow  processes  of  industry,  combined  with  skill  and  the  use 
of  capital.  Bubble  wealth  is  created  by  the  rapid  process  of  placing 
one  piece  of  paper  in  the  possession  of  a  trust  company  as  collateral 
security  for  two  pieces  of  paper.  Some  of  the  enormous  quantity 
of  bubble  wealth  which  is  now  being  created  will  sooner  or  later 
collapse.  Such  collapse  should  affect  nobody  but  the  bubblers. 
But  without  a  system  of  banks  which  can  sustain  legitimate  credits, 
there  will  follow  a  panic  which  will  again  destroy  the  market  value 
of  intrinsic  values,  ruin  debtors,  deprive  laborers  of  employment, 
and  create  general  distress. 

Would  that  I  had  the  ability  to  arouse  the  American  people  to 
the  importance  of  a  banking  system  !  In  panic  after  panic  they  have 
suffered,  but  their  minds  seem  to  be  possessed  with  the  fatalism  of 
the  Turk — "it  is  the  will  of  Allah  I"  But  I  say  it  is  not  the  will  of 
God  which  produces  panics.  History  abundantly  proves  that  such 
panics  as  occurred  in  this  country  in  1837,  1857,  1873,  and  1893  are 
preventable  by  a  known  system  of  banking. 

This  system  of  banking  originated  in  Scotland,  separated  by  only 
an  imaginary  line  from  the  then  independent  and  isolated  banks  of 
England.     The  superiority  of  the  system  was  demonstrated  through 


BANKING  REFORM  AND  CURRENCY  SECTION  217 

commercial  crisis  after  crisis,  in  all  of  which  the  Scotch  banks 
remained  solvent  and  continued  the  exercise  of  the  banking  func- 
tion, while  the  independent  banks  of  England  suspended  the  bank- 
ing function  and  fell  like  rows  of  bricks. 

In  1825  a  parliamentary  commission  developed  the  fact  that  in 
the  panic  of  1793  upward  of  a  hundred  English  country  banks  had 
failed.  In  seven  years,  1810  to  1817,  six  hundred  failed,  and  in  the 
panic  of  1825,  up  to  the  date  of  the  inquiry,  twenty-six  failures  had 
taken  place.  The  banks  which  failed  paid  but  a  small  percentage  of 
their  indebtedness.  Before  the  same  commission  Mr.  Gilchrist,  a 
manager  of  one  of  the  Scotch  banks,  testified  that  within  his  recol- 
lection only  one  Scotch  bank  had  failed,  and  it  immediately  paid 
fourteen  shillings  on  the  pound,  and  ultimately  paid  all  its  liabilities. 

The  superiority  of  the  system  having  been  thus  proven,  by  a 
gradual  process  of  amalgamation  of  independent  banks,  the  system 
was  introduced  into  England,  and  the  superiority  of  the  system  over 
the  want  of  system  in  the  United  States  has  since  been  demonstrated. 

In  the  great  panic  of  1837-38  more  than  a  thousand  banks, 
practically  all  the  banks  in  the  United  States,  failed.  In  England 
and  Scotland  not  a  bank  failed.  In  1856  nearly  every  bank  in  the 
United  States  closed  its  doors  and  went  out  of  business,  and  but 
few  of  them  ever  resumed.  There  was  a  great  commercial  crisis 
in  Great  Britain,  but  not  a  bank  in  England  or  Scotland  failed. 
Again  in  1873  a  great  many  banks  in  the  United  States  failed,  but 
there  were  no  bank  failures  in  Great  Britain,  except  the  City  of 
Glasgow  Bank,  which  had  been  practicing  fraudulent  methods  for 
years. 

In  the  panics  of  1890-93.  which  are  now  fresh  in  the  memory, 
when  bank  after  bank  failed  in  the  United  States,  and  all  the  banks 
in  New  York  City  suspended  payments  and  only  certified  their  cus- 
tomers' checks,  there  was  not  a  bank  failure  in  Great  Britain.  And 
more,  there  was  not  a  day  when  any  bank  in  Great  Britain  refused 
to  extend  its  usual  credits  without  unusual  restrictions;  except  for 
about  a  wed:  in  1890,  at  the  time  of  the  Barings'  failure,  when  they 
put  the  brake  on  to  the  extent  of  raising  the  rate  of  interest  to  6 
per  cent. 

This  system  ha  1  n  adopted  by  the  countries  of  continental 
Europe.     The   United   Si  the  only  nation  in  the  world,  of 


2i8    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

commercial  importance,  which  has  not  adopted  it.  It  is  a  remark- 
able fact  that  during  the  last  panic,  while  the  commercial  crisis  was 
universal,  there  were  no  bank  panics  except  in  the  United  States. 
In  no  other  country  was  the  commercial  crisis  continued  so  long, 
and  in  no  other  country  did  the  people  distrust  the  solvency  of  their 
banks,  and  in  no  other  country  were  there  bank  failures. 

But  it  may  be  objected  that  the  situation  is  different  in  a  vast 
area  of  sparsely  settled  country  like  the  United  States.  In  reply  I 
will  say  that  along  our  northern  boundary  stretches  a  country  from 
ocean  to  ocean,  much  more  sparsely  settled  than  the  United  States. 
Canada  possesses  a  system  of  banks.  In  Canada  the  same  com- 
mercial conditions  existed  during  the  last  panic  as  in  the  United 
States,  but  only  two  unimportant  banks  of  the  isolated  and  inde- 
pendent order  went  into  liquidation,  and  not  one  of  their  systems  of 
banks  excited  suspicion  as  to  its  solvency,  and  at  no  time  during  the 
panic  did  any  of  them  suspend  the  banking  function  of  swapping 
credits  with  customers. 

In  1893,  1894,  and  1895,  when  the  great  banks  of  New  York 
City  dared  not  extend  their  credits  a  cent,  the  Canadian  banks 
advanced  millions  to  move  the  wheat  crops  of  my  own  state  of 
Minnesota  and  the  state  of  Dakota.  Little  Canada,  with  scarcely 
five  millions  of  people,  occupying  the  stingy  fringe  of  perpetual  ice, 
with  meager  agricultural  resources,  few  mines,  and  only  rich  in  her 
forests  of  timber,  was  able  to  loan  the  credits  to  move  the  abundant 
harvests  of  Minnesota  and  Dakota,  solely  by  reason  of  her  system  of 
banking. 

It  would  seem  that  nothing  short  of  a  special  act  of  Providence 
would  enable  our  lawmakers  to  investigate  the  banking  problem  free 
from  that  political  bias  which  is  an  inheritance  from  a  squabble 
between  the  Democratic  and  Whig  parties  over  a  petty  appointment 
in  the  Portsmouth,  New  Hampshire,  branch  of  the  Bank  of  the 
United  States.  The  only  question  involved  at  the  outset  of  the 
squabble  was  whether  the  bank  or  the  Democratic  politicians  of  New 
Hampshire  should  appoint  the  petty  officials  of  the  bank.  But 
Andrew  Jackson  and  the  Democratic  party  cunningly  magnified  it, 
in  the  minds  of  the  people,  into  a  contest  to  "preserve  the  liberties 
of  the  people  against  the  encroachments  of  the  money  power."  And 
from  that  day  to  the  present  time  the  legislation  of  Congress  has 


BANKING  REFORM  AND  CURRENCY  SECTION  219 

been  based  upon  the  supposed  necessity  of  making  the  banks  ineffi- 
cient in  order  to  preserve  the  liberties  of  the  people. 

A  banking  system  for  a  great  nation  like  the  United  States 
requires  a  central  bank,  with  a  head  in  the  chief  commercial  city, 
with  branches  in  each  of  the  commercial  centers,  which  shall  con- 
stitute the  head  and  the  backbone  of  the  system.  This  central  bank 
should  be  the  bank  of  the  banks,  and  the  bank  of  the  government. 
The  subtreasuries  should  be  abolished.  The  central  bank  should 
hold  the  gold  reserve  of  all  the  banks  and  of  the  nation.  The 
reserves  of  the  other  banks  should  consist  of  credits  on  the  ledger 
of  the  central  bank.  Sub-systems  should  be  formed,  consisting  of 
heads  in  important  commercial  centers,  with  branches  scattered  over 
the  country,  thus  carrying  the  facilities  of  great,  strong,  solvent 
banks  to  every  hamlet  and  crossroad  in  the  country. 

The  only  legislation  required  is  the  repeal  of  the  subtreasury 
laws,  and  of  the  provisions  of  the  present  National  Bank  Law  which 
in  any  manner  restrict  the  business  of  swapping  credits,  and  which 
prevent  banks  from  conducting  the  banking  function  in  more  than 
one  locality.  It  would  not  be  necessary,  or  indeed  desirable,  to 
grant  the  central  bank  a  special  charter,  with  or  without  special 
privileges.  The  banking  business  is  a  part  of  commerce,  and  com- 
merce is  an  individual,  not  a  governmental,  function.  The  com- 
mercial bank  is  a  co-worker  with  the  merchant,  and  in  the  conduct 
of  its  legitimate  business  of  swapping  credits  should  be  as  free  as 
the  merchant.  Grant  the  banking  business  this  freedom,  and  the 
system,  including  the  central  bank,  will  form  itself  along  the  lines 
of  the  economic  laws  to  which  alone  commerce  by  right  owes 
allegiance. 

Such  a  system,  history  conclusively  proves,  has  the  capacity  to 
continue  exercising  the  banking  function,  and  thereby  sustaining 
normal  values,  during  the  fiercest  commercial  crises.  A  system 
having  such  a  capacity,  in  connection  with  the  genius  for  trade 
possessed  by  the  people  of  the  United  States,  and  the  wealth  of  its 
natural  resources,  may  make  New  York,  instead  of  London,  the 
chief  exchange  city  of  the  world,  and  the  United  States,  instead  of 
England,  the  creditor  nation  of  the  world;  without  it.  never. 

The  creditor-nation  fad  is  not  altogether  a  matter  of  superior 
wealth  or  capital.     England  is  the  creditor  nation,  but  it  may  well 


220     PRACTICAL  TROBLEMS  IN  BANKING  AND  CURRENCY 

be  doubted  whether  she  has  as  much  wealth  or  capital  as  the 
United  States.  It  is  a  matter  of  organization  of  capital.  Let  me 
illustrate:  If  I  have  $1,000,000  of  capital,  as  an  individual  I  can 
loan  only  $1,000,000.  But  if  I  organize  a  banking  business  with 
my  capital  and  exercise  the  banking  function  of  swapping  credits, 
I  may  collect  interest  on  many  millions,  just  as  some  of  your  banks 
with  a  million  of  capital  loan  five,  ten,  twenty,  and  even  more  mil- 
lions. England  has  so  organized  her  capital  by  means  of  her  mag- 
nificent banking  system  that  she  is  the  banker  of  the  world  and  col- 
lects tribute  from  all  the  nations  of  the  world  in  the  form  of  inter- 
est, not  for  the  use  of  her  wealth  or  capital,  but  for  the  use  of  her 
credit.  Paradoxical  as  it  may  sound,  it  is  literally  true  that  by 
means  of  her  splendid  banking  organization  England  collects  inter- 
est upon  millions  and  millions  of  her  own  indebtedness  to  other 
nations.  It  is  a  very  profitable  business  to  collect  interest  on  what 
one  owes,  and  it  is  this  which  makes  England  the  creditor  nation. 
The  United  States,  as  its  capital  is  now  organized,  can  loan  to 
foreign  nations  only  actual  capital,  and  as  long  as  these  conditions 
last  cannot  compete  with  a  nation  which  can  loan  all  it  dares  to 
owe.  //  is  not  more  capital,  more  wealth,  or  more  money  which 
the  United  States  needs  in  order  to  become  the  creditor  nation,  but 
a  better  organisation.  The  fact  that  approximately  a  third  of  the 
money  of  the  United  States  is  locked  up  idle  and  useless  in  the 
Treasury  is  evidence  that  we  have  money  enough. 

The  capital  engaged  in  banking  in  the  United  States  is  much 
larger  than  the  capital  engaged  in  banking  in  Great  Britain.  I 
investigated  this  point  a  few  years  ago,  and  found  that  the  paid- 
up  aggregate  capital  of  all  the  joint-stock  banks  of  England,  Scot- 
land, and  Wales,  including  the  Bank  of  England,  was  only  $345,- 
000,000,  while  the  capital  of  the  national  banks  alone  of  the  United 
States  at  the  same  date  was  $648,000,000.  The  medium  of  exchange 
produced  by  the  banks  of  Great  Britain  was  $3,822,000,000,  while 
the  medium  of  exchange  produced  by  the  national  banks  of  the 
United  States  was  only  $2,600,000,000.  By  their  superior  organ- 
ization the  banks  of  Great  Britain,  with  approximately  half  the 
capital,  produced  nearly  twice  the  amount  of  the  medium  of 
exchange. 

It  was  a  dream  of  Sir  Walter  Raleigh,  as  it  is  of  some  of  our 


BANKING  REFORM  AND  CURRENCY  SECTION  221 

statesmen,  that  whoever  controls  the  seas  will  control  the  commerce 
of  the  world,  and  whoever  controls  the  commerce  of  the  world  will 
control  the  wealth  of  the  world,  and  therefore  the  world  itself. 
But  I  venture  to  suggest  that  you  may  subsidize  ships  to  sail  the 
seas,  and  your  armies  and  navies  may  carry  the  flag  to  all  the 
islands  of  the  seas,  but  you  will  never  control  the  commerce  of  the 
world,  nor  the  wealth  of  the  world,  nor  the  world  itself,  until  you 
have  a  banking  system  which  can  manage  the  exchanges  of  the 
world  during  commercial  crises,  and  maintain  at  all  times  a  fairly 
uniform  rate  of  interest. 

I  should  like  to  ask  those  statesmen  who  seem  to  think  that 
carrying  the  flag  at  the  tail  end  of  ships  changes  the  course  of  trade, 
at  what  price  a  banker  in  Manila  will  buy  time  drafts  on  New  York 
against  consignments,  as  long  as  he  knows  that  by  the  time  the  draft 
reaches  New  York  for  rediscount  the  current  rate  of  interest  may 
be  any  rate  between  2  per  cent,  per  annum  and  a  quarter  of  I  per 
cent,  per  day,  or  that  the  banks  of  New  York  may  then  refuse  to 
rediscount  at  any  rate  because  they  are  scared ;  and  on  what  terms 
could  the  Manila  banker  reimburse  himself  by  selling  to  importers 
drafts  on  scared  banks !  I  should  like  to  ask  them  what  they  pro- 
pose to  do  in  the  next  panic.  Perhaps  they  expect  that  the  Presi- 
dent of  the  United  States  will  issue  a  proclamation  to  all  the  mer- 
chants of  the  world,  stating  that  there  is  a  panic,  that  half  of  the 
banks  are  "busted,"  and  the  remainder  are  so  paralyzed  that  they 
will  be  unable  to  do  business  for  probably  three  years,  but  that  he 
hopes  foreign  merchants  will  consign  their  goods  to  the  United 
States,  but  make  their  drafts  on  Canada ! 

The  wares  of  commerce  follow  the  drafts  of  commerce,  instead 
of  a  flag,  and  the  principal  reason  why  Great  Britain  is  the  market- 
place of  the  zvorld's  commerce  is  not  because  the  Union  Jack  flies 
at  the  tail  end  of  so  many  ships,  but  because  every  banker  and  mer- 
chant in  every  quarter  of  the  zvorld  knozvs,  within  2  or  3  per  cent, 
per  annum,  the  exact  value  of  a  draft  for  rediscount  in  London. 

Gentlemen,  I  fear  that  the  length  of  my  address  has  already 
wearied  you,  but  I  have  stated  only  a  few  of  the  historical  facts 
which  are  available  in  support  of  the  proposition  that  the  periodical 
panics  which  occur  in  this  country  are  preventable.  I  hope  you  will 
not  misunderstand  my  proposition.     I  (\o  not  claim  that  a  system  of 


222     PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

banking  has  boon  devised  which  will  prevent  periods  of  undue 
speculation,  followed  by  commercial  crises  in  which  the  speculators 
will  be  ruined.  I  do  not  claim  that  any  system  of  banking  is  a 
panacea  for  all  the  difficulties  of  commerce.  But  I  do  claim  that 
there  is  a  tried  and  proven  system  of  banking  which  has  the  capacity 
so  to  support  legitimate  credits  during  commercial  crises  as  to  main- 
tain normal  valuations  of  property,  and  thereby  preserve  the  legiti- 
mate traders,  and  keep  the  wheels  of  industry  in  motion,  and  labor 
fully  employed  at  normal  wages.  I  also  claim  that  such  a  system 
of  banks  is  necessary  to  enable  this  country  successfully  to  compete 
in  the  commerce  of  the  world.     I  stand  upon  these  propositions. 

Such  a  system  of  banking  in  no  respect  resembles  a  trust.  It 
does  not  restrict  competition.  In  a  visit  to  a  town  of  only  4,000 
population  in  British  Columbia,  I  found  branches  of  five  of  the  great 
Canadian  banks  competing  for  the  business  of  that  little  town. 
Besides,  loss  of  a  life's  savings  by  the  insolvency  of  banks,  bank- 
ruptcy of  solvent  debtors,  distress  of  families  reduced  from  com- 
parative affluence  to  want,  lack  of  labor,  a  bed  on  the  bare  ground 
in  summer  and  on  the  bare  floor  of  a  police  station  in  the  winter, 
soup  kitchens,  and  other  incidents  of  the  panic,  are  no  part  of  the 
liberties  of  the  people. 

I  appeal  to  you,  as  representatives  of  the  banking  interests,  and 
as  patriotic  citizens,  to  give  this  important  matter  more  than  a  pass- 
ing thought.  This  subject  is  incomparably  of  more  importance  than 
any  detail  of  internal  bank  management.  Have  the  courage  at  least 
to  discuss  it,  and,  if  thought  wise,  put  the  machinery  in  motion  for 
another  campaign  of  education.  The  subject  only  needs  to  be 
properly  presented  to  receive  the  support  of  the  people. 


DESIRABLE  CHANGES  IN  THE  BANKING  LAW 

ADDRESS   DELIVERED   EY   A.    BARTON    HEPBURN,   PRESIDENT  OF  THE  CHASE   NATIONAL 
BANK   OF   NEW   YORK  CITY,   MARCH,    IQX>2. 

It  was  Jefferson  who  said,  "That  country  is  governed  best  which 
is  governed  least."  This,  being  interpreted,  means  that  men  should 
be  protected  in  their  lives,  liberty,  and  property  rights  with  as  little 


BANKING  REFORM  AND  CURRENCY  SECTION  223 

paternalism  on  the  part  of  the  government  as  possible.  In  all 
civilized  nations  there  are  certain  public  utilities  or  functions  inti- 
mately affecting  the  people  as  a  whole,  too  great  and  too  important 
to  be  entrusted  to  individual  enterprise.  A  government  must  pro- 
tect its  citizens  at  home  and  abroad ;  hence  our  armies  and  navies. 
Government  must  provide  courts  to  interpret  laws,  determine  and 
enforce  the  rights  of  citizens  and  punish  those  who  offend  against 
the  body  politic.  It  is  equally  a  duty  of  government  to  provide 
highways  for  the  convenience  of  travel  and  interchange  of  com- 
modities; also  for  the  transmission  of  intelligence  by  mail  or  wire. 
Experience  proves  that  this  latter  function  may  be  best  exercised 
by  enlisting  private  enterprise  through  corporations  invested  with 
the  right  of  eminent  domain,  but  subject  to  government  regulation. 
As  a  consequence,  railways  owned  by  individuals  transport  persons, 
property,  and  the  mails,  while  telegraph  and  telephone  companies, 
with  their  quicker  service,  keep  abreast  of  the  age. 

There  seems  to  be  a  growing  demand  that  all  these  public  util- 
ities shall  be  owned  and  operated  by  the  government.  The  trend  of 
events  seems  to  be  strongly  in  that  direction.  Conceive  the  entire 
steel  and  iron  industries  of  the  country  under  the  control  of  a  single 
corporation.  It  is  but  a  short  step  from  a  single  corporate  control, 
where  the  management  has  only  an  investment  interest — the  hope  of 
dividends — in  the  thousands  of  human  digits  employed,  to  govern- 
mental control,  where  the  management  would  have  a  humanitarian 
as  well  as  a  financial  interest  in  the  lives  and  welfare  of  the  employed. 
Conceive  the  railways  of  the  country  in  a  single  system,  or  two  or 
three  systems,  and  how  long  would  it  be  before  the  inevitable  fric- 
tion between  the  public  and  the  management  would  enforce  govern- 
mental control  and  ownership?  The  power  of  taxation  involved  in 
the  fixing  of  prices  for  great  staple  commodities,  and  the  fixing  of 
rates  of  transportation,  in  its  effect  upon  and  its  relation  to  the 
public,  dwarfs  in  importance  the  power  of  taxation  exercised  by  the 
government  for  the  ordinary  purposes  of  administration.  Legisla- 
tion is  invading  every  field.  Questions  formerly  determined  by 
common  law  depend  upon  the  construction  of  a  statute.  To  mag- 
nify and  extend  the  functions  of  government  is  surely  the  tendency 
of  the  age.  This  tendency  is  being  accelerated,  not  by  populists  or 
socialists,  but  by  the  opposite  extreme,  the  moneyed  class — the  class 


224 


PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 


most  opposed  to  such  a  consummation.  The  relations  between  the 
management  of  our  great  industries  and  the  government  are  neces- 
sarily close.  Economic  laws,  export  bounties,  and  tariff  restrictions 
are  enacted  with  a  view  to  fostering  industry.  Territorial  expansion 
and  commercial  development  seem  to  have  taken  the  place  of  ter- 
ritorial expansion  and  military  aggrandizement  as  the  motto  and  the 
motive  of  the  nations.  The  navy  of  France,  hovering  along  the 
Dardanelles,  recently  enforced  payment  from  Turkey  of  a  debt  due 
to  citizens  of  France.  The  relation  between  government  and  indi- 
vidual enterprise  is  becoming  closer  and  more  intimate  the  world 
over.  The  continual  extension  of  the  sphere  of  governmental  con- 
trol and  the  consequent  narrowing  of  the  sphere  of  individual  influ- 
ence cannot  be  regarded,  I  think,  except  with  some  feelings  of 
apprehension.  It  is  this  tendency  that  makes  it  so  difficult  to  take 
our  government  out  of  the  banking  business.  As  the  government 
civil  list  increases,  let  us  hope  that  civil  service  principles  will 
become  so  firmly  imbedded  in  the  public  mind  as  to  preserve  and  not 
endanger  the  merit  system,  else  the  government  payroll  may  become 
the  means  of  fortifying  the  party  in  power. 

The  banking  interests,  like  all  other  important  interests  of  the 
country,  are  suffering  from  too  much,  as  well  as  too  little,  legisla- 
tion. National  banks  are  not  allowed  to  establish  branches,  while 
the  law  as  to  reserve  tends  to  weld  the  system  together  and  prevent 
a  bank  from  going  into  the  state  system,  where  branches  may  be 
allowed.  The  large  banks  in  metropolitan  centres,  with  large  cap- 
ital, easily  increased  as  occasion  may  require,  large  deposits,  large 
resources,  following  a  natural  economic  law,  would  establish 
branches  and  agencies  throughout  this  country  and  other  countries, 
according  to  the  magnitude  of  their  business,  and  according  to  the 
business  advantage  and  probable  profit  which  each  locality  might 
offer.  In  this  way  the  capital  of  our  money  centres  would  be  profit- 
ably employed,  with  corresponding  advantage  to  the  various  interior 
localities  during  the  periods  of  their  greatest  business  activity,  when 
commercial  needs  exceed  the  resources  of  local  institutions.  Such 
a  system  would  strongly  tend  to  equalize  the  rates  of  interest 
throughout  the  country,  and  by  so  doing  minimize  the  sectional  feel- 
ing which  now  exists  and  is  largely  predicated  upon  money  condi- 
tions.    Such  a  system  would  insure  comparatively  few  large  banks 


BANKING  REFORM  AND  CURRENCY  SECTION  225 

with  branches  throughout  the  country.  This  would  insure  the  best 
kind  of  competition  between  strong  and  resourceful  institutions. 
The  central  institution  controlling  the  resources  of  the  system  could 
bestow  its  credits  where  the  demand  was  greatest,  thus  realizing  the 
best  returns  upon  its  funds  and  affording  the  public  the  best  service 
by  dispensing  its  credits  where  most  needed.  Such  institutions 
would  be  splendidly  equipped  for  furnishing  a  bank-note  currency. 

There  are  three  central  reserve  cities,  New  York,  Chicago,  and 
St.  Louis,  required  by  law  to  keep  a  cash-in-bank  reserve  equal  to 
twenty-five  per  cent,  of  their  deposits.  There  are  twenty-nine  other 
reserve  cities,  each  with  a  population  exceeding  fifty  thousand, 
required  to  keep  a  twenty-five  per  cent,  reserve  against  deposits, 
one-half  cash  in  bank  and  one-half  with  approved  reserve  agents 
in  central  reserve  cities.  All  other  banks  are  required  to  keep  a 
six  per  cent,  cash-in-bank  reserve,  and  nine  per  cent,  may  be  with 
approved  agents  in  some  reserve  city.  In  the  smaller  towns  and 
cities  the  greater  percentage  of  actual  currency  is  used.  They  can- 
not transact  their  current  business  with  a  cash  reserve  of  less  than 
six  per  cent,  of  their  deposits.  The  present  law  is  no  restriction  at 
all.  If  the  purpose  of  the  law  is  to  strengthen  banks  it  would  be 
better  to  require  reserve  cities  to  keep  fifteen  per  cent,  and  the 
smaller  towns  ten  per  cent,  cash  in  bank  reserve,  and  to  leave  the 
balance  to  be  maintained  with  correspondents  regulated  by  the 
necessity  of  protecting  their  drafts  and  other  considerations.  Only 
a  national  bank  can  be  a  reserve  agent  of  another  national  bank. 
This  provision  of  the  law  keeps  the  larger  banks  of  our  cities  in  the 
national  system,  as  it  is  deemed  more  advantageous  to  be  the  corre- 
spondent of  interior  banks  than  to  establish  branches,  as  might  be 
done  under  some  state  laws.  Then,  too,  banks  not  only  deal  in 
credit,  but  subsist  upon  credit,  and  a  bank  would  experience  diffi- 
culty in  commanding  entire  public  confidence  while  doing  what 
institutions  organized  under  the  National  law  are  forbidden  to  do. 

As  I  have  stated  before,  banking,  like  all  other  branches  of  busi- 
ness, following  a  natural  law,  would  seek  to  extend  the  field  of  its 
labors  and  increase  its  returns  by  the  establishment  of  branches  and 
agencies.  This  is  shown  by  the  experience  of  other  nations  and  by 
the  experience  of  our  own  states  prior  to  i860.  Tn  nothing  is  it 
more  strongly  shown  than  by  the  efforts  at  present  making  to 
15 


226  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

accomplish  indirectly  the  benefits  attendant  upon  branch  banking  by 
purchasing  control  of  or  an  interest  in  other  banks,  as  many  of  our 
leading  institutions  are  doing  at  the  present  time  upon  quite  an 
extended  scale.  We  also  read  of  holding-  companies  and  trust 
companies  organized  under  the  laws  of  the  different  states  for  the 
avowed  purpose  of  acquiring  and  holding  stocks  in  different  insti- 
tutions throughout  the  country.  The  counterfeit  is  the  strongest 
endorsement  that  can  be  given  to  the  genuine. 

Congress  made  pooling  agreements  by  railroads  illegal,  and 
under  the  anti-trust  law  the  Supreme  Court  held  that  the  fixing  and 
maintaining  of  traffic  rates  was  illegal.  On  account  of  these  pro- 
hibitions and  because  of  the  necessity  of  having  certain  and  pre- 
determined traffic  arrangements  with  each  other,  there  developed  the 
community  of  interest  and  joint  ownership  system  which  now 
obtains.  Cost  of  transportation  is  a  vital  element  in  the  cost  of  all 
finished  products,  and  in  order  that  a  merchant  may  deal  fairly  with 
the  public  and  conduct  his  business  intelligently,  he  must  know  the 
cost  of  transportation  of  the  commodities  in  which  he  deals  for  a 
period  extending  many  months  into  the  future.  Where  his  ship- 
ments are  over  not  one  road,  but  several  different  roads,  it  necessar- 
ily follows,  in  common  fairness  to  the  public  as  well  as  to  the  mer- 
chant, that  these  several  roads  should  be  allowed  to  unite  in  making 
a  rate  not  only  for  the  present,  but  for  the  future.  Thus  the  busi- 
ness interests,  confronted  by  these  prohibitions,  sought  some  other 
method  of  accomplishing  the  desired  result;  hence  most  of  the 
railways  east  of  Chicago  and  north  of  the  Ohio  have  passed  into  the 
control  of  either  the  New  York  Central  or  the  Pennsylvania  system ; 
and  hence  also  the  process  of  absorption  in  other  parts  of  the  coun- 
try by  means  of  joint  ownership  or  holding  companies  or  other- 
wise, which  is  arousing  such  keen  public  interest  at  the  present  time. 

The  prohibition  against  the  establishment  of  branches  and  the 
desirability  of  close  affiliation  is  developing  rapidly  a  system  of  joint 
ownership  in  banks.  To  what  extent  it  may  be  carried,  and  how 
successful  it  may  be  as  a  business  venture  to  the  investors,  and 
whether  it  will  increase  or  diminish  the  ability  of  such  institutions 
to  serve  the  public,  remains  to  be  seen.  Such  institutions,  owned 
by  strong  people  and  in  the  hands  of  conservative  managers,  could 
certainly  render  the  public  great  service.     If,  however,  the  stock  of 


BANKING  REFORM  AND  CURRENCY  SECTION  227 

one  institution  be  purchased  with  money  borrowed  in  others  of  the 
affiliated  banks,  it  might  become  in  troublesome  times  a  source  of 
danger.  In  no  case  can  separately  organized  banks,  maintaining 
separate  and  distinct  corps  of  officers  and  organization,  be  as  econom- 
ically managed  as  a  single  bank  with  branches,  nor  can  they  be 
managed  with  the  same  facility,  using  their  funds  where  most 
desired,  and  transferring  the  same  from  locality  to  locality  in  accord- 
ance with  the  public  need. 

It  is  an  unquestioned  function  of  government  to  provide  its  citi- 
zens with  currency — money.  Money  is  the  ingredient  that  assimi- 
lates all  business  transactions,  reduces  all  barter  to  a  common  unit 
— a  common  denominator,  and  permits  set-off  and  payment  of  bal- 
ances. In  respect  to  circulating  medium,  as  with  transportation, 
experience  shows  that  this  function  of  government  can  best  be 
exercised  conjointly  with  private  enterprise — the  banks.  The  best 
results  in  government  seem  to  be  obtained  where  paternalism  is 
reduced  to  a  minimum.  The  proper  money  function  of  the  govern- 
ment is  set  forth  in  the  Constitution.  It  is  given  the  power  to  coin 
money  and  regulate  the  value  thereof — a  power  withheld  from  the 
states — and  there,  I  believe,  its  function  of  creating  money  should 
end. 

Before  analyzing  our  currency,  let  us  see  to  what  extent  actual 
money  enters  into  the  actual  transactions  of  the  country.  Data 
obtained  from  the  national  banks  at  widely  separated  periods  by 
several  comptrollers  of  the  currency,  showing  in  detail  the  actual 
business  of  the  banks  as  it  was  transacted  for  the  day,  demonstrate 
that  ninety-two  per  cent,  of  all  the  business  that  passes  through 
banks  is  consummated  by  means  of  credit,  witnessed  by  book-keep- 
ing. Economy  and  convenience  have  induced  a  minimum  use  of 
money  and  a  maximum  use  of  credit.  The  amount  of  domestic 
exchange — checks  and  drafts — drawn  upon  each  other  by  the 
national  banks  during  the  year  was  $12,999,959,950,  and  with  other 
banks  and  bankers  included  the  aggregate  would  approximate 
$20,000,000,000.  The  total  exchanges  for  the  fifty-seven  clearing- 
house cities  in  1892  were  $61,017,832,067,  while  the  balances,  which 
alone  were  paid  in  cash,  were  $4,881,777,289 — about  eight  per 
cent.  The  average  daily  exchanges  in  the  New  York  Clearing- 
house for  the  year    1901    were  $262,113,592.10,  and  the  average 


228  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

balances  paid  in  cash  were  $12,083,874.97,  equaling  .046  per  cent. 
Only  fifteen  minutes  are  allowed  at  the  clearing-house  to  complete 
the  exchanges,  and  about  twelve  minutes  usually  consumed.  In  this 
modicum  of  time  and  with  this  minimum  of  money  is  this  vast  vol- 
ume of  business  consummated. 

I  give  these  practical  illustrations,  not  to  convey  information, 
but  to  emphasize  the  limited  office  which  actual  money  performs  in 
the  barter  and  trade  of  our  country,  and  to  show  how  easily  a  money 
stringency  may  be  created  when  credit  is  withheld,  when  distrust 
limits  the  use  of  auxiliary  currency — checks  and  drafts — and  thus 
to  emphasize  the  necessity  of  a  currency  possessing  elasticity.  We 
have  in  circulation  $2,250,256,230  of  currency  that  serves  the  eight 
per  cent,  of  business.  This  currency  is  created  and  regulated  by  the 
government.  We  have  now  in  use  gold  and  silver,  gold  and  silver 
certificates  representing  actual  coin  on  deposit  in  the  treasury,  and 
subsidiary  silver  coin.  We  have  greenbacks  and  certificates  repre- 
senting greenbacks  on  deposit.  We  have  silver  warehouse  receipts, 
issued  under  the  act  of  July  14,  1890,  in  use  as  money,  and  also 
national  bank  notes — nine  different  kinds  of  money,  differing  in 
their  commercial  use  and  money  power.  Gold  certificates  represent 
actual  gold  on  deposit  in  the  treasury  and  are  similar  to  Bank  of 
England  notes,  which,  with  the  exception  of  £17,200,000,  represent 
actual  gold  on  deposit.  Silver  certificates  are  the  paper  proxy  for 
so  much  coin  in  the  vaults  of  the  treasury,  which,  notwithstanding 
it  was  the  "dollar  of  our  daddies,"  could  not  be  coaxed  into  circu- 
lation in  any  other  way.  They  are  redeemable  in  silver  dollars  and 
"are  receivable  for  customs,  taxes,  and  all  public  dues,  and  when  so 
received  may  be  reissued." 

The  greenback,  so  called,  is  a  non-interest  bearing  bond  or  note 
representing  a  forced  loan.  It  is  a  "legal  tender  at  its  face  value 
for  all  debts,  public  and  private,  except  duties  on  imports  and  interest 
on  the  public  debt."  It  is  fair  to  assume  that  these  notes  will  at 
some  time  be  retired.  National  bank  notes  have  a  quasi  legal  func- 
tion. They  are  receivable  for  all  debts  due  the  United  States,  except 
duties  upon  imports,  and  are  receivable  "for  all  salaries  and  other 
debts  and  demands  owing  by  the  United  States  to  individuals,  cor- 
porations, and  associations  within  the  United  States,  except  interest 
on  the  public  debt."     They  are  also  receivable  as  between  national 


BANKING  REFORM  AND  CURRENCY  SECTION  229 

banks  in  payment  of  indebtedness.  The  notes  issued  under  the  act 
of  1890  (Sherman  law)  were  given  in  payment  for  a  commodity 
which  the  government  did  not  want,  and  for  no  other  reason  than 
to  placate  the  silver  interests  and  furnish  a  note  to  circulate  as 
money.  They  are  better  than  the  Bland  dollar  (act  of  February 
28,  1878),  because  at  the  time  of  issue  they  represented  a  gold  dol- 
lar's worth  of  silver.  The  Bland  dollar  never  did.  The  notes 
issued  under  this  act  of  1890  are  "a  legal  tender  at  their  face  value 
in  payment  of  all  debts,  public  and  private,  except  when  otherwise 
expressly  stipulated  in  the  contract."  Both  the  Bland  law  and  the 
Sherman  law  injected  into  circulation  a  fixed  amount  monthly,  with- 
out regard  to  the  wants  of  commerce.  However  great  the  demands 
of  trade,  the  government  could  not  increase  the  amount,  and  neither 
could  it  diminish  the  amount,  however  redundant  the  volume  of  cur- 
rency may  have  been. 

Upon  the  earnest  recommendation  of  Secretary  Chase,  rein- 
forced by  President  Lincoln  in  his  message  of  1862,  the  National 
bank  act  was  passed  early  in  1863.  It  was  urged  as  a  measure  of 
currency  reform,  it  is  true;  but  the  principal  argument,  and  the  one 
which  secured  its  passage,  was  the  need  of  the  government  for  a 
market  for  its  bonds  in  order  to  raise  necessary  funds  for  the  prose- 
cution of  the  war,  which  bonds  the  banks  must  purchase  as  a  basis 
for  circulation.  But  little  was  accomplished,  however,  until  the 
imposition  of  the  ten  per  cent,  tax  upon  state  bank  circulation  on 
March  3,  1865.  This  gave  the  national  banks  a  monopoly  of  bank 
circulation.  The  framers  of  this  act  had  no  thought  to  formulate 
a  currency  system  for  a  great  commercial  nation.  Thirty-seven 
years  after  the  war,  with  bonds  scarce  and  yielding  a  very  low  rate 
of  interest,  with  little  or  no  profits  upon  circulation,  with  population 
more  than  doubled  and  wealth,  resources,  and  volume  of  business 
increased  in  much  greater  ratio,  we  are  confronted  with  this  provi- 
sion of  law  as  to  circulation  unchanged. 

I  have  recounted  facts  with  which  you  are  all  familiar  to  empha- 
size the  unscientific  character  of  our  currency.  Our  currency  legis- 
lation represents  a  battlefield  in  which  neither  contending  force  was 
able  wholly  to  maintain  its  lines,  and  compromise  has  been  per- 
mitted to  work  the  usual  havoc.  It  is  not  the  result  of  deliberations 
of  Congress  seeking  to  formulate  a  currency  system  for  a  great  com- 


230 


PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 


mercial  nation,  but  rather  of  legislation  having  for  its  main  purpose 
the  accomplishment  of  some  other  object.  As  the  period  of 
McKinley's  first  term  was  drawing  to  a  close  and  his  re-election 
was  desirable,  his  political  friends  realized  that  prosperity  and  good 
times  were  the  strongest  guarantees  of  success.  Easy  money  is  a 
most  powerful  factor  in  producing  good  times.  Refunding  the 
presently  maturing  government  bonds  into  a  long-time,  low-rate 
bond,  with  reduced  taxation  upon  circulation  secured  by  such  bonds 
as  an  inducement  to  banks  to  take  them,  would  insure  cheap  and 
plentiful  money;  hence  the  gold  standard  act  of  March  14,  1900. 
When  good  politics  and  good  policy  join  hands,  Congress  becomes 
an  attentive  listener.  It  is  most  unfortunate  and  almost  inexplicable 
that  in  a  time  like  the  present,  so  well  adapted  to  calm  deliberation 
and  wise  conclusions,  free  from  prejudice  or  passion,  this  great 
question  of  currency  reform  is  absolutely  ignored  and  is  likely  to 
remain  so  until  the  turmoil  of  party  strife  shall  again  bring  it  to  the 
front. 

Secretary  Gage  recommends  branch  banking  as  the  most  potent 
remedy  for  many  of  the  evils  of  banking,  but  alleges  that  public 
sentiment  will  not  tolerate  it,  and  therefore  seeks  approximately  to 
accomplish  its  advantages  by  indirection.  He  also  seeks  to  do  away 
with  the  arbitrary  and  harmful  disturbance  of  business  affairs 
occasioned  by  our  subtreasury  system.  The  taxes  derived  from 
customs  and  internal  revenue  are  paid  into  the  subtreasury,  the 
amount  being  thus  withdrawn  from  circulation.  These  funds  can 
be  again  brought  into  circulation  only  by  payment  of  some  indebted- 
ness or  obligation  of  the  government.  Whenever  the  taxes  collected 
exceed  the  disbursements,  currency  is  absorbed,  and  the  volume 
available  for  commercial  transactions  is  thereby  reduced.  The 
excess  of  income  over  expenditures  for  the  present  year  is  estimated 
at  one  hundred  million  dollars.  To  obviate  the  disastrous  effect 
upon  trade  caused  by  the  locking  up  of  such  a  very  large  sum,  the 
treasury  is  at  present  carrying  $111,000,000  in  depositary  banks. 

The  scheme  of  Secretary  Gage,  as  elucidated  by  subsequent  utter- 
ances, is  substantially  as  follows :  He  suggested  a  federated  bank, 
and  used  the  Federal  government  in  its  relations  to  the  state  and  local 
governments  to  illustrate  his  banking  idea.  He  would  take,  for 
instance,  the  four  thousand-odd  national  banks  of  the  country,  with 


BANKING  REFORM  AND  CURRENCY  SECTION  231 

their  capital  exceeding  one  billion  dollars,  and  let  each  bank  sub- 
scribe to  the  stock  of  the  central  or  federated  bank  in  proportion  to 
its  capital,  say  5  per  cent.  That  would  create  a  central  bank  with 
a  capital  of  fifty  million  dollars.  Let  this  bank  be  controlled  by  a 
board  of  directors  elected  by  the  stockholding  banks,  each  $1,000 
being  entitled  to  one  vote — the  central  bank  to  keep  accounts  and  do 
business  with  the  stockholding  banks  only ;  that  is,  to  be  a  bank  of 
banks.  It  might  perhaps  be  allowed  to  loan  its  funds  on  demand 
upon  collateral  in  order  to  increase  its  profits  when  there  was  no 
demand  for  funds  on  the  part  of  any  of  its  constituent  banks;  but 
it  should  not  receive  the  accounts  of  corporations  or  individuals. 
It  should  be  essentially  a  bank  of  banks — a  depositary  of  the  public 
moneys  of  the  government,  thus  doing  away  with  the  subtreasury 
system  and  keeping  the  funds  of  the  government  in  commercial  chan- 
nels, instead  of  locking  the  same  up  as  now;  this  central  bank  to 
have  supervision  over  its  constituent  members  or  stockholders,  with 
the  power  to  make  examinations  as  now  exercised  by  the  office  of 
the  Comptroller  of  the  Currency — to  have  the  right  to  issue  bank- 
note circulation  against  its  general  assets  or  its  credit,  and  in  times 
of  necessity  to  be  allowed  to  issue,  with  a  capital  of  fifty  million  dol- 
lars, two  hundred  million  dollars  of  circulating  notes — the  govern- 
ment not  to  be  represented  in  the  directory  or  official  management 
of  the  institution — such  a  bank  to  have  branches  at  important  points, 
as,  for  instance,  where  the  subtreasuries  or  mints  exist  at  the 
present  time.  Such  a  bank  would  undoubtedly  do  away  with  the 
principal  difficulties  and  dangers  attendant  upon  the  present  sub- 
treasury  system.  It  would  also  furnish  a  currency  good  beyond 
peradventure  and  elastic — responsive  to  the  needs  of  business ;  but 
if  authorized,  would  it  succeed? 

The  individual  localities  throughout  the  country  have  no  surplus 
money  to  invest  in  the  stock  of  a  central  banking  institution,  and  if 
the  individual  banks  throughout  the  country  are  to  be  pro  rata  stock- 
holders in  a  central  bank,  they  would  be  at  least  pro  rata  claimants 
for  the  favors  of  such  bank,  and  probably  would  claim  its  consider- 
ation in  a  much  greater  proportion  than  their  stockholdings  or 
deposits  would  warrant.  The  principle  underlying  this  scheme  is 
the  converse  of  the  principle  underlying  branch  hanking.  Instead 
of  the  money  centres  furnishing  capital  to  the  country  at  large,  the 


232    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

country  at  large  is  to  furnish  the  capital  of  a  central  bank.  The 
resources  of  the  proposed  institution  would  consist  of  its  capital, 
government  deposits  and  more  or  less  deposits  from  its  banking 
stockholders,  and  circulating  notes.  Would  such  an  institution 
allow  interest  upon  daily  balances,  and,  if  not,  to  what  extent  would 
the  banks  of  the  country  maintain  balances  with  it?  To  what 
extent  would  its  business  harmonize  with,  or  be  in  rivalry  with,  the 
business  of  its  constituent  owners?  Even  without  other  resources 
than  its  capital,  government  deposits,  and  its  power  to  issue  circulat- 
ing notes,  it  would  be  a  very  powerful  factor  in  the  commercial 
affairs  of  the  country.  By  extending  credit  to  its  constituent  mem- 
bers it  would  reach  all  parts  of  the  country,  and  if  it  did  not  allow 
interest  upon  daily  balances  it  could  afford  to  adopt  a  conservative 
course  as  to  investments,  contenting  itself  with  a  lesser  rate  and 
enjoying  greater  security. 

The  joint  ownership  of  this  central  bank  might  insure  harmony 
of  relations  between  itself  and  its  stockholders ;  on  the  other  hand, 
importunate  claimants  for  undue  consideration  on  account  of 
fancied  political  or  sectional  claims,  because  of  the  government 
deposits  which  the  institution  would  control,  might  lead  to  dissatis- 
faction and  possibly  bad  investments.  Such  an  institution,  in  pos- 
session of  government  deposits,  would  be  measurably  the  custodian 
of  the  public  credit,  and  must  at  all  times  be  ready,  not  only  to  honor 
the  government's  demand  for  funds,  but  make  a  public  showing  of 
its  assets  which  would  inspire  confidence  in  its  liquid  condition,  both 
at  home  and  abroad.  Would  it  not  necessarily  be  constrained  to 
loan  its  funds  largely  upon  the  quickly  convertible  securities  of  our 
business  centres?  In  its  practical  workings,  would  it  not  be  a  dis- 
appointment to  the  rural  interests  of  our  country? 

Banking  is  based  upon  reciprocity.  Every  individual  or  corpor- 
ation maintaining  a  bank  account  has  a  banking  equity  proportioned 
to  the  value  of  that  account,  which  must  be  recognized  in  the  form 
of  loans  or  discounts  or  other  accommodation  when  required. 
Otherwise  the  account  would  seek  a  home  elsewhere.  The 
exchanges  of  the  country  could  be  liquidated  and  reduced  to  cash 
much  more  quickly  and  economically  by  the  clearing-houses  of  our 
different  cities  than  by  the  individual  banks.  It  would  be  a  saving 
in  clerical  labor,  postage,  and  otherwise,  if  the  clearing-house  of 


BANKING  REFORM  AND  CURRENCY  SECTION  233 

New  York  were  to  send  to  the  clearing-house  of  Chicago  all  the 
items  for  the  day,  payable  at  Chicago  and  the  immediate  territory 
for  which  it  collects,  instead  of  having  those  items  sent,  as  now,  by 
the  one  hundred  and  forty  banks  now  directly  or  indirectly  clearing 
through  the  New  York  Clearing-house.  Each  individual  bank, 
however,  does  and  will  continue  to  send  items  to  its  representative 
or  representatives  in  Chicago,  because  the  handling  of  those  items 
is  an  advantage  to  its  Chicago  correspondent  and  brings  reciprocal 
business  in  exchange  therefor.  This  principle  of  reciprocity,  or 
selfish  interest,  which  prompts  each  institution  to  direct  its  business 
in  channels  which  will  bring  business  in  return,  would  in  a  measure 
militate  against  the  success  of  the  proposed  federated  bank. 

Mr.  Gage's  suggestions  literally  carried  out  would  amount  to  a 
practical  consolidation  of  the  banks.  I  think  the  interest  of  the 
country  in  banking,  as  in  all  other  business,  will  be  best  conserved 
by  a  wholesome  rivalry  and  competition.  Mr.  Gage's  suggestions 
should  be  judged  leniently,  however.  He  recognizes  a  public 
prejudice  against  branch  banking,  which  is  the  natural  outgrowth 
of  forty  years'  experience  with  such  a  system  under  the  ban  of  our 
national  laws.  He  asserts  this  prejudice  or  conviction  on  the  part 
of  the  public  to  be  insurmountable,  and  seeks  by  indirection  to 
approximate  the  advantages  of  such  a  system.  That  may  justify 
his  attitude  in  dealing  with  Congress,  but  in  an  academic  discussion 
we  should  insist  upon  what  we  believe  to  be  right. 

No  locality  is  more  in  need  of  an  elastic  currency  system  than  the 
city  of  New  York.  Heretofore,  in  times  of  money  stringency,  resort 
has  been  had  to  clearing-house  certificates  to  afford  relief.  Clear- 
ing-house certificates  are  an  obligation,  issued  by  a  clearing-house 
to  members  of  that  association,  secured  by  a  deposit  of  their  assets, 
with  a  25  per  cent,  margin.  These  certificates  are  receivable  in  the 
settlement  of  balances  at  the  clearing-house.  They  amount  to  a 
suspension  of  specie  or  currency  payment,  as  between  banks,  and 
so  far  as  the  checks  of  individuals  or  corporations  which  pass 
through  the  clearing-house  arc  concerned,  they  amount  to  a  sus- 
pension of  currency  payment  as  between  individuals.  In  1893  such 
certificates  were  issued  to  the  banks  of  this  city  by  the  clearing- 
house, amounting  in  the  aggregate  to  $41,490,000.  They  afforded 
very  great  relief  to  the  commercial  interests  of  the  whole  country. 


234  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

The  conditions  at  that  time  were  unique.  Business  conditions  were 
good  generally,  and  the  panic  was  brought  about  wholly  by  a  dis- 
trust of  the  credit  of  the  government,  and  the  fear  that  the  country 
was  going  upon  a  silver  basis.  The  time  has  gone  by  when  clear- 
ing-house certificates  may  be  safely  used  in  the  city  of  New  York. 
They  would  materially  impair  our  national  prestige  as  a  money 
power  in  the  world  of  finance  and  depreciate  our  securities  as  a 
nation.  They  would  materially  injure  the  banking  and  commercial 
interests  of  our  city.  Any  temporary  relief  they  might  afford  would 
be  presently  more  than  offset  by  the  diversion  of  remittances  from 
interior  and  Western  towns,  who  would  send  their  deposits  to  Chi- 
cago and  other  cities  where  currency  payments  were  maintained. 
The  commercial  welfare  of  New  York  demands  that  the  public  be 
taught — not  only  our  own  country,  but  the  world  at  large — that  their 
money  is  nowhere  safer  than  in  this  city,  and  that  it  will  be  returned 
when  called  for  in  any  form  of  payment  which  may  be  required. 

Panic  means  business  paralysis.  The  fear  of  loss  induces  people 
to  lock  up  their  money  and  withhold  credit,  and  stagnation  naturally 
ensues.  The  only  way  possible  for  relieving  such  a  condition  of 
affairs  is  to  move  the  product  of  the  country,  be  it  wheat,  cotton, 
iron,  steel,  in  fact  all  merchandise,  to  the  markets  of  the  world,  in 
order  to  realize  its  value,  thereby  relieving  the  stringency  and 
restoring  a  normal  condition  of  affairs.  In  the  hands  of  the  pro- 
ducers these  commodities  must  be  paid  for  in  money.  The  field- 
hand,  the  factory-hand,  and  labor  generally  require  to  be  paid  in 
money.  Actual  currency  must  perform  this  function.  As  a  debtor 
nation  in  the  past  it  was  very  well  to  tide  over  temporary  embar- 
rassment with  clearing-house  certificates.  As  a  creditor  nation, 
doing  business  on  our  own  capital  and  furnishing  capital  to  others, 
we  must  have  a  currency  adequate  to  all  needs. 

Shortly  after  the  panic  or  currency  famine  of  1893,  by  means  of 
extensive  correspondence  with  every  considerable  place  in  the  coun- 
try, I  obtained  statistics  which  justify  the  estimate  that  there  was 
issued,  of  clearing-house  certificates  used  in  settlement  between 
banks,  of  certified  checks,  certificates  of  deposit,  and  cashiers'  checks, 
in  round  amounts  (as  one,  five,  ten,  twenty  and  fifty  dollars),  due 
bills  from  manufacturers  and  other  employers  of  labor,  and  clear- 
ing-house certificates,  in  round  amounts  (in  the  case  of  Birming- 


BANKING  REFORM  AND  CURRENCY  SECTION  235 

ham,  Ala.,  as  small  in  amount  as  twenty-five  cents),  all  designed  to 
take  the  place  of  currency  in  the  hands  of  the  public,  an  amount  in 
the  aggregate  of  one  hundred  million  dollars.  Clearing-house 
certificates,  issued  and  used  in  settling  debit  balances  to  a  clearing- 
house, were  in  no  wise  prohibited,  but  all  of  the  above-described 
evidences  of  debt  which  were  issued  to  circulate  among  the  public 
as  money  were  clearly  subject  to  the  10  per  cent,  prohibitive  tax, 
which  was  enacted  for  the  purpose  of  getting  rid  of  state  bank  cir- 
culation. This  temporary  currency,  however,  performed  so  valu- 
able a  service  in  such  a  crucial  period  in  moving  the  crops  and  keep- 
ing business  machinery  in  motion,  that  the  government,  after  due 
deliberation,  wisely  forbore  to  prosecute.  In  other  words,  the  want 
of  elasticity  in  our  currency  system  was  thus  partially  supplied. 
The  government  was  powerless  to  afford  relief.  Our  currency  was 
as  unresponsive  to  the  wants  of  trade  as  the  pyramid  of  Cheops. 
Some  banks  borrowed  United  States  bonds  from  savings  banks  and 
other  institutions  and  took  out  circulation,  but  no  bank  could  buy 
bonds  and  take  out  circulation  without  aggravating  instead  of  reliev- 
ing the  money  stringency. 

What  we  need  is  legislation  (or  relief  from  legislation)  that  will 
permit  banks  to  do  within  the  law  and  under  wholesome  regulations 
precisely  what  the  banks  under  stress  of  necessity  did  in  1893  in 
contravention  of  law.  A  bank-note  is  not  money.  It  is  a  substi- 
tute for  money — a  non-interest  bearing  obligation  of  the  banks  to 
pay  to  the  bearer  a  certain  amount  in  legal  tender  money  upon 
demand.  It  should  not  be  a  legal  tender;  the  legal  tender  quality 
would  tend  to  prevent  its  return  for  redemption,  and  thus  impair 
its  elasticity.  Called  into  existence  by  some  commercial  need,  local 
to  the  bank  of  issue,  it  should  appear  and  disappear  at  the  beck  and 
nod  of  commerce. 

The  Imperial  Hank  of  Germany  is  authorized  to  issue  uncovered 
notes  to  the  amount  of  450,000,000  marks.  All  notes  issued  in 
excess  of  this  limit  must  have  an  equal  amount  of  cash  held  against 
the  same  in  tin-  reserve.  The  bank  may.  however,  exceed  the  limit- 
ation of  the  cash  reserve  by  paying  into  the  imperial  treasury  a  tax 
of  5  per  cent,  on  the  surplus  issue,  provided,  however,  that  the  bank 
shall  maintain  at  all  times  a  reserve,  exclusive  of  the  notes  of  other 
banks,  equal  to  one-third  of  its  notes  in  circulation.     During  the 


236  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

acute  financial  stringency  which  existed  in  Germany  last  year,  and 
from  which  it  has  not  yet  wholly  recovered,  the  Imperial  Bank 
issued  over  100,000,000  marks  in  excess  of  the  limitation  of  the  cash 
reserve,  upon  which  it  paid  a  5  per  cent,  tax  into  the  imperial  treas- 
ury. Such  circulation,  so  taxed,  could  hardly  be  profitable  to  the 
bank,  and  yet  it  afforded  very  great  relief  to  the  business  interests 
of  the  empire.  Imagine  what  financial  disasters  might  have  ensued 
had  their  currency  laws  been  similar  to  our  own.  Imagine  the 
advantages  to  our  own  country  of  such  a  superior  currency  system, 
compared  with  our  rigid  laws,  modified  only  by  clearing-house  cer- 
tificates, limited  in  their  use  to  bank  settlements. 

Mr.  Gage,  in  his  last  report  to  Congress,  recommended:  "That 
any  national  banking  association  which  shall  deposit  30  per  cent,  of 
its  capital  in  the  form  of  United  States  bonds  at  their  par  value,  and 
20  per  cent,  of  its  capital  in  United  States  legal  tender  notes  with 
the  Treasury  of  the  United  States  as  security  therefor,  shall  be 
entitled  to  issue  its  circulating  notes  to  an  amount  equal  to  its  paid- 
in  and  unimpaired  capital.  In  addition  to  the  deposit  of  security  so 
required,  banks  permitted  to  issue  notes  as  above  shall  pay  semi- 
annually to  the  treasurer  of  the  United  States,  in  trust,  an  amount 
equal  to  one-eighth  of  one  per  cent,  on  their  capital  stocks,  respect- 
ively, such  payments  to  constitute  a  guarantee  fund  for  the  protec- 
tion of  the  note  of  any  bank  which,  by  reason  of  insolvency,  shall 
become  unable  to  pay  its  notes  on  demand."  This  proposition  con- 
templates a  partial  retirement  of  the  greenbacks,  and  authorizes 
credit  currency  equal  to  50  per  cent,  of  a  bank's  capital. 

Recently,  the  chairman  of  the  committee  on  banking  and  cur- 
rency of  Congress  has  introduced  into  that  body  a  comprehensive 
scheme  for  currency  reform.  It  does  away  with  the  office  of  Comp- 
troller of  the  Currency,  as  now  constituted,  and  substitutes  in  place 
thereof  a  board  consisting  of  three  members.  Banks  are  to  assume 
the  current  retirement  of  $130,000,000  of  the  outstanding  United 
States  notes,  commonly  called  greenbacks ;  the  government  coinci- 
dent therewith  is  to  retire  $65,000,000,  leaving  only  $151,000,000 
outstanding.  In  graduated  amounts,  covering  a  period  of  five  years, 
the  banks  which  assume  the  current  redemption  of  United  States 
notes  may  take  out  asset  circulation  equal  to  60  per  cent,  of  their 
paid-up,  unimpaired  capital,  and  thereafter  a  provision  is  made  for 


BANKING  REFORM  AND  CURRENCY  SECTION  237 

an  emergency  circulation,  subject  to  an  increased  rate  of  taxation. 
The  country  is  divided  up  into  clearing-house  districts  with  refer- 
ence to  note  redemption.  A  guarantee  fund  is  provided  by  taxation 
to  redeem  the  notes  of  insolvent  banks.  The  Secretary  of  the 
Treasury  is  authorized  to  deposit  treasury  funds  in  excess  of  $50,- 
000,000  (not  including  the  $150,000,000  gold  reserve)  with  the 
national  banks,  which  are  required  to  pay  interest  at  the  rate  of  one 
per  cent,  per  annum.  Silver  dollars  are  made  interchangeable  with 
gold.  Branch  banking  is  authorized.  The  effect  of  such  a  com- 
prehensive measure  is  to  unite,  in  opposition  to  the  enactment  of  the 
proposed  law,  all  elements  who  are  opposed  to  any  one  of  its  pro- 
visions. It  concentrates  and  unites  the  opposition,  and  renders  the 
success  of  such  a  proposition  more  than  doubtful. 

The  greenback  was  one  of  the  instrumentalities  for  putting  down 
the  rebellion.  Its  use,  its  legality,  its  continuance,  were  questioned 
by  many  and  violently  assailed  by  those  people  least  in  sympathy 
with  the  prosecution  of  the  war,  and  by  the  people  of  the  recon- 
structed states  since  the  termination  of  the  war.  Thus  the  patriotic 
sentiment  of  the  country  was  arrayed  in  support  of  the  greenback. 
It  has  received  something  of  the  veneration  accorded  to  the  old 
soldier.  It  is  regarded  as  cheap  money  by  the  populace  generally, 
and  good  beyond  question,  because  it  is  a  direct  obligation  of  the 
government.  Its  hold  upon  public  sentiment  is  so  great  as  to 
determine  in  advance  the  fate  of  any  bill  looking  to  its  retirement. 
And  yet  it  seems  impossible  for  any  public  official  or  representative 
to  propose  any  scheme  of  currency  reform  without  handicapping 
his  proposition  with  provisions  looking  to  the  retirement  of  the 
greenbacks.  It  seems  to  me  that  the  wise  course  to  pursue  and  the 
practical  method  of  accomplishing  results  would  be  to  formulate  a 
bill  authorizing  asset  currency  simply.  Predicate  such  action  upon 
the  necessity  and  desirability  of  having  a  currency  responsive  to 
the  needs  of  commerce,  that  can  increase  in  volume  as  the  popula- 
tion and  volume  of  the  business  of  the  country  as  a  whole  increases. 
Let  such  a  currency  be  once  established  and  in  practical  operation 
vindicate  its  safety  and  utility  ;  then  public  sentiment  will  readily 
accommodate  itself  to  the  idea  of  the  retirement  of  the  greenbacks. 


238    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

BRANCH  BANKING 

ADDRESS  DELIVERED  BY  JAMES  B.  FOROAN,  PRESIDENT  OF  THE  FIRST  NATIONAL 
BANK  OF  CHICAGO,  BEFORE  THE  BANKERS'  CLUB  OF  MILWAUKEE  IN  MAY, 
1902. 

Our  subject,  in  its  relation  to  the  commercial,  financial,  and 
industrial  interests  of  the  country,  is  one  of  vast  importance,  and 
to  us  as  bankers  it  is  of  special  significance. 

In  the  evolution  of  the  business  methods  of  the  country,  so 
aggressive  in  other  lines,  what  is  to  be  our  permanent  system  of 
banking?  That  such  a  question  should  remain  unanswered  in  the 
present  stage  of  our  industrial  development  seems  incredible. 
That  it  does  so  remain,  however,  is  evidenced  not  only  by  the  per- 
sistent agitation  of  the  subject,  but  by  the  consensus  of  authoritative 
opinion  in  regard  to  it.  We  are  not  satisfied  with  what  we  now 
have. 

The  development  of  a  national  system  of  banking  in  this  country 
has  twice  been  diverted  from  its  natural  course.  In  the  first  instance 
by  erroneous  politics,  when  President  Jackson  refused  to  renew  the 
charter  of  the  Bank  of  the  United  States ;  and  again  when,  for  the 
purpose  of  creating  a  market  for  its  bonds,  the  federal  government 
established  our  present  national  system  of  isolated  banks. 

Had  banking,  as  in  the  case  of  other  lines  of  business,  been 
allowed  to  work  out  its  own  destiny  untrammeled  by  politics  and 
free  from  subordination  to  government  necessities,  a  system  would 
ere  this  have  been  established  which  would  have  made  itself  felt  as 
a  potent  factor  in  the  financial  affairs  of  nations.  We  should  also 
now  have  a  system  that  would  stand  together  for  the  public  benefit 
in  times  of  financial  distress.  As  it  is  to-day,  we  have  no  banks  that 
will  compare  in  financial  strength  and  power  with  those  of  other 
countries.  While  actively  competing  with  other  nations  in  the 
fields  of  commerce  and  industry,  it  must  be  admitted  that  in  the 
world's  finance  we  are  away  behind  in  the  race ;  nor  does  our  system 
even  satisfactorily  provide  for  our  own  domestic  requirements.  The 
need  of  coalition  among  our  unit  banks  is  urgent. 

In  times  of  financial  distress,  instead  of  standing  together  in  aid 
of  the  public,  our  isolated  banks  are  compelled,  by  the  very  law  of 
their  existence  and  by  the  law  of  self-preservation,  to  assume  a 
hostile  attitude  toward  each  other.     This  is  why  for  the  past  decade 


BANKING  REFORM  AND  CURRENCY  SECTION  239 

the  rehabilitation  of  the  banking  business  has  been  persistently 
advocated.  A  gratifying  feature  of  recent  discussion  is  that  it  is 
being  carried  on  outside  the  domain  of  politics.  Business  men, 
bankers,  writers  on  finance,  university  professors,  and  students  are 
all,  from  their  different  points  of  view,  carefully  studying  the  ques- 
tion, and  there  is  reason  to  hope  that  it  will  be  settled  on  its  merits. 
I  am  not  at  all  pessimistic  about  it.  In  other  lines  of  business, 
through  the  federation  of  interests,  new  methods  are  being  evolved 
in  behalf  of  economy  of  administration,  and  for  the  better  perform- 
ance of  public  functions.  Some  method  of  evolution  will  be  devised 
that  will  federate  the  interests  of  the  banks  so  that  the  individual 
rights  of  each  shall  not  be  sacrificed. 

One  thing  urgently  necessary  is  concerted  instead  of  independent 
action  in  the  face  of  pending  danger.  Our  strength  is  in  our  cash 
reserves,  which  we  should  be  able  to  concentrate,  instead  of  being 
compelled  to  scatter  when  danger  threatens.  Reserves,  properly 
controlled,  in  times  of  financial  distress  will  prevent  crises.  With 
10,000  separate  banks,  each  controlling  its  own  small  portion  of 
them  and  scrambling  to  get  that  portion  into  its  own  custody,  our 
reserves  are  scattered  and  the  strength  of  the  system  is  dissipated. 

In  this  regard  branch  banking  has  a  decided  advantage.  Under 
it  the  cash  reserves  are  controlled  by  the  general  management,  and 
are  placed  where  they  are  needed.  They  can  be  moved  from  one 
branch  to  another  without  reducing  the  aggregate  held  by  the  bank. 
The  money  belongs  to  the  bank  whether  it  be  locked  up  in  the  vaults 
of  the  head  office  or  of  the  branches.  The  public  mind  is  not  there- 
fore alarmed  by  the  fluctuations  in  cash  on  hand  that  take  place  in 
the  large  financial  centers  owing  to  shipments  to  the  country.  With 
branch  banking  a  great  saving  could  be  effected  in  the  financing  of 
the  system. 

To  illustrate  this,  suppose  a  consolidation  of  the  First  National 
Banks  of  Milwaukee,  St.  Paul,  Minneapolis,  Omaha,  Kansas  City, 
and  Chicago.  I  have  combined  the  figures  of  these  six  banks.  Let 
us  then  for  the  nonce  imagine  them  to  be  six  branches  of  one  bank 
and  compare  the  combined  figures  with  those  of  the  largest  Canadian 
bank — the  Bank  of  Montreal,  with  its  forty-eight  branches. 


240 


PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 


The    capital 

The  surplus  and  undivided  profits 

The    deposits 

The  circulating  notes 

The  loans  and   discounts 

The    government    securities 

The  bonds  and  stocks 

The  banking  houses,  furniture  and  fixtures 

The  other  real  estate  and  mortgages 

The  due  from  other  banks 

The  cash  on  hand 


Of  the 

Of  the 

Combination 

Bank  of  Montreal 

$     8,750,000 

$    12,000,000 

6,391,857 

8,479,743 

126,415,117 

84,672,239 

2,131,280 

8,308,340 

$143,688,254 

$113,460,322 

$  77,380,975 

$  89,559,026 

3,786,370 

617,697 

9,222,901 

4,284,352 

270,219 

600,000 

262,324 

133.306 

27,555,816 

9,217,100 

25,209,649 

9,048,841 

$143,688,254 

$113,460,322 

The  percentage  of  cash  on  hand  to  gross  deposits  is  19.6  against  9.7. 

The  percentage  of  cash  means,  including  balances  in  other  banks,  to 
gross  deposits  is  41  against  19.6. 

The  percentage  of  balances  due  from  banks  to  gross  deposits  is  21.5 
against  9.9. 

The  amount  invested  in  loans  and  securities  as  compared  with  total  re- 
sources is  62.9  per  cent,  against  83.1  per  cent. 

How  is  it  that  the  Bank  of  Montreal  thus  invests  83  per  cent,  of 
its  total  resources,  while  we  can  invest  only  63  per  cent,  of  ours? 
The  difference  in  the  amounts  carried  as  balances  due  by  banks 
largely  accounts  for  it.  I  have  shown  you  that  the  combination  has 
$27,555,816  in  this  item  against  $9,217,100  held  by  the  Bank  of 
Montreal,  or  21.5  per  cent,  of  gross  deposits  against  9.9  per  cent. 
Nor  is  this  comparison  strictly  correct,  for  the  Bank  of  Montreal 
includes  balances  due  by  its  own  agencies  in  Great  Britain  and  the 
United  States,  which  probably  represent  about  half  the  amount.  It 
shows  no  balance  at  all  due  from  other  banks  in  Canada.  All  its 
balances  due  by  banks  are  foreign. 

Now,  how  is  it  that  we  find  this  great  Canadian  bank  running 
forty-eight  branches  with  cash  reserves  of  about  10  per  cent,  of  its 
deposits  and  balances  due  by  other  banks  of  say  5  per  cent.,  or 
available  cash  resources  of  only  15  per  cent,  against  41  per  cent, 
shown  by  the  combination  ?  It  is  simply  because  they  can  do  their 
entire  domestic  exchange  and  collection  business  within  themselves, 


BANKING  REFORM  AND  CURRENCY  SECTION  241 

and  have  no  occasion  to  deposit  any  of  their  funds  with  other 
domestic  banks.  The  balances  which  each  of  our  banks  now  carries 
with  correspondents  for  exchange  purposes  are  entirely  eliminated 
when  they  become  branches  of  banks  with  officers  in  the  financial 
centers.  If  the  banks  I  have  referred  to  were  one  institution,  and, 
in  addition  to  their  six  offices  in  the  Northwest,  established  a  branch 
in  New  York,  the  item  balances  due  from  other  banks  would  dis- 
appear from  its  statement  except  as  to  balances  due  from  banks  in 
foreign  countries.  This  would  enable  it  to  loan  at  current  rates 
from  $20,000,000  to  $25,000,000  of  funds  now  carried  as  balances 
due  from  banks.  In  other  words,  the  earning  capacity  of  that 
amount  of  its  funds  would  be  increased  about  2  per  cent.,  yielding 
some  $400,000  or  $500,000  a  year  additional  profit.  A  closer 
examination  of  the  Bank  of  Montreal's  statement  will  show  this 
more  plainly.  A  part  of  its  loans  and  discounts  is  grouped  in  its 
statement  along  with  its  cash  on  hand  and  balances  due  from  banks. 
It  is  thus  treated  as  an  immediately  convertible  asset,  and  therefore 
part  of  its  available  cash  resources.  It  in  fact  takes  the  place  of 
balances  due  from  banks  in  our  statements.  It  is  stated  as  "call 
and  short  loans  in  Great  Britain  and  United  States,"  and  amounts 
to  $29,397,548,  or  one-third  of  the  bank's  total  loans.  It  probably, 
as  I  have  already  indicated,  earns  for  the  bank  about  2  per  cent, 
more  than  the  corresponding  item  in  our  statements  earns  for  us, 
or  about  $600,000  per  annum,  equal  to  a  dividend  of  5  per  cent, 
on  the  bank's  capital. 

I  do  not  want  to  be  understood  as  making  an  argument  for  a 
reduction  in  the  legal  cash  reserves.  In  Canada,  where  no  limit  is 
prescribed  by  law,  the  banks  are  now  being  financed  on  what  appears 
to  me  to  be  a  dangerously  low  percentage  of  cash  reserves.  In  a 
recent  annual  report  the  general  manager  of  one  of  the  strongest 
banks  in  Canada  says : 

With  thirty-one  hanks,  eight  held  cash  exceeding  9  per  cent,  of  liabilities; 
fourteen  carried  from  5  to  9  per  cent.,  and  ten  less  than  5  per  cent.;  some  of 
the  latter  less  than  2  per  cent.  Five  years  ago  the  percentage  of  cash  to 
bank  liabilities  in  Canada  was  9.84.  It  is  now  a  little  over  7  per  cent.  The 
decline  is  significant,  and  the  attenuated  cash  reserves  held  in  many  cases 
brush  aside  every  argument  against  fixed  cash  reserves  and  call  for  the 
immediate  enactment   of  appropriate  legislation. 

This  is  a  word  of  warning  which  should  be  sufficient  to  stop 
16 


242  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

the  theorists  in  this  country  from  arguing  for  the  abolishment  of 
the  legal  limit  of  cash  reserves.  The  legal  cash  reserve  is  all  right; 
only,  were  branch  banking  permitted,  it  would  have  to  be  adjusted 
to  the  new  conditions.  Banks  with  their  head  offices  in  central 
reserve  cities  could  not  maintain  25  per  cent,  legal  cash  reserve  for 
the  deposits  at  the  branches.  It  would  not  be  necessary.  The  dis- 
continuance of  the  legal  reserve  of  outside  banks  forming  so  large 
a  part  of  the  deposits  of  reserve  city  banks,  which  branch  banking 
would  bring  about,  would  make  a  15  per  cent,  cash  reserve  ample. 
This  would  be  about  double  that  carried  by  the  Canadian  banks. 

An  act  to  amend  the  Bank  Act  is  now  before  the  Canadian  Par- 
liament, which  provides  that  banks  must  carry  cash  reserves  of  not 
less  than  10  per  cent,  of  their  liabilities  to  the  public.  A  penalty  of  6 
per  cent,  per  annum  on  any  deficiency  for  the  period  of  default  is  ex- 
pected to  insure  the  observance  of  the  law  in  ordinary  times  and  pro- 
vide some  elasticity  in  tight  times.  This  act  also  appoints  a  comp- 
troller to  take  charge  of  the  government  inspection  of  the  banks. 
Canada  originally  got  its  branch-bank  system  from  the  United  States 
instead  of  from  Scotland,  as  is  sometimes  erroneously  stated.  Alex- 
ander Hamilton  was  the  author  and  founder  of  it.  It  was  strangled 
by  politics  before  it  took  firm  root  in  this  country,  but  was  adopted 
by  Canada  and  allowed  to  develop  naturally.  It  has  been  improved 
upon  there  from  time  to  time  by  judicious  legislation  calculated  to 
build  it  up  and  strengthen  it.  We  should  not,  therefore,  hesitate  to 
take  back  what  we  gave,  if  we  want  it.  Our  Canadian  friends  will 
not  grudge  us  any  new  ideas  which  their  experience  of  it  may  have 
developed.  They  got  their  original  ideas  from  us,  and  even  now 
propose  to  adopt  probably  the  only  two  features  of  our  system  which 
would  improve  theirs— legal  reserve  limitation  and  governmental 
inspection. 

In  his  annual  report,  recently  issued,  the  Comptroller  of  the 
Currency  shows  that  on  September  10,  1901,  the  national  banks  had 
13.7  per  cent,  of  their  total  resources  on  deposit  with  other  banks, 
while  the  thirty-four  chartered  banks  of  Canada  had  only  5.1  per 
cent,  so  employed.  This  comparison  is  striking  enough,  but  does 
not  reveal  the  whole  truth.  The  national  banks  do  not  in  their 
statements  separate  domestic  from  foreign  balances.  The  Canadian 
banks  do,  and  the  balances  due  from  banks  in  Canada  amount  to  the 


BANKING  REFORM  AND  CURRENCY  SECTION  243 

insignificant  sum  of  only  $4,629,921.  The  aggregate  amount  of 
balances  due  by  banks  in  the  combined  statement  of  the  national 
banks  is  $785,000,000.  Probably  $85,000,000  of  this  is  due  from 
foreign  banks,  leaving  the  enormous  sum  of  $700,000,000  in  balances 
due  in  account  between  banks  in  this  country.  How  much  of  this 
amount  under  branch  banking  would  be  available  as  additional  funds 
loanable  to  the  public  it  would  be  difficult  to  compute.  The  banks 
that  owe  the  balances  use  them  the  same  as  they  use  their  other 
deposits.  Were  our  banks  divided  up  into  large  institutions,  with 
branches  capable  of  financing  their  exchange  transactions  largely 
within  themselves,  they  would  be  saved  the  necessity  of  carrying 
balances  with  other  banks.  Such  balances  would  exist  only  between 
the  branches  separately  and  the  head  office.  The  branches  do  not 
keep  accounts  with  each  other,  but  each  has  an  account  with  the  head 
office  through  which  its  operations  with  the  other  branches  are 
cleared.  Hence,  as  already  stated,  and  as  shown  by  the  Canadian 
banks'  statements,  balances  due  by  one  bank  to  another  are  prac- 
tically eliminated.  The  economy  in  this  must  be  apparent.  The 
result  would  be  to  make  a  considerable  portion  of  this  $700,000,000 
available  for  additional  loans  to  the  public,  and  consequently  a 
further  reduction  in  the  discount  rate.  But  this  is  not  the  only 
benefit  that  would  accrue  by  the  elimination  of  these  bank  balances. 
They  are  really  a  great  weakness,  and  a  perpetual  menace  to  our 
system. 

In  the  last  annual  report  of  Mr.  Dawes,  as  Comptroller  of  the 
Currency,  he  called  the  attention  of  Congress  to  this  subject.  He 
pointed  out  the  danger  to  our  system  of  permitting  so  large  a  por- 
tion of  the  legal  reserves  of  one  bank  to  be  represented  by  deposits 
in  another.  Mr.  Dawes  was  entirely  right  in  his  diagnosis.  It  is 
a  danger  which  confronts  us  whenever  public  confidence  weakens. 
Whenever  individual  banks,  through  fear,  withdraw  their  funds 
from  their  reserve  agents  and  fortify  themselves  by  increasing  their 
cash  reserves  in  their  own  vaults,  then  enforced  liquidation  takes 
place  at  the  financial  centers,  where  weekly  reports  of  the  shrinkage 
are  published  for  the  further  terrifying  of  the  already  alarmed 
public. 

In  September,  1892,  the  aggregate  of  balances  due  from  banks 
shown  in  the  combined  statements  of  the  national  banks  was  $409,- 


244 


PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 


523,000.  A  year  later,  in  1893,  during  the  panic,  it  was  reduced  by 
$132,000,000  to  $277,469,000.  During  the  same  period  the  cash 
held  by  the  same  banks  was  increased  from  $347,870,000  to  $369,- 
860,000,  an  increase  of  $22,000,000.  The  bank  balances  did  not 
recover  in  amount  the  figures  of  1892  until  1897;  since  which  time 
they  have  rapidly  increased,  and  are  now,  as  already  stated,  the 
enormous  sum  of  $785,033,000.  The  fluctuation  between  1892  and 
1893  is  instructive,  and  the  rapid  increase  since  1897  ominous. 

I  have  prepared  a  statement  showing  the  greatest  possible  multi- 
plication of  deposits  under  our  present  system  of  allowing  a  portion 
of  the  legal  reserves  of  one  bank  to  be  held  as  deposits  in  another. 
For  illustration  national  banks  in  Deadwood  (not  a  reserve  city), 
Omaha  (a  reserve  city),  Chicago  (a  central  reserve  city)  and  New 
York,  the  financial  center  of  the  country,  are  used. 

Must  be  retained 

in  vault  as 

cash  reserve 

On  a  deposit  in  Deadwood  of  $64,000    $  3,840    $60,160   may    be     deposited 

with  Omaha  cor- 
respondent. 

Of  the  deposit  in  Omaha  of        60,160        7,520      52,640    may     be     deposited 

with  New  York 
correspondent. 

Of  the   deposit    in    Chicago   of  52,640      13,180      39,460   may     be     deposited 

with  Chicago  cor- 
respondent. 

Of  the  deposit  in  New  York  of  39,460        9,865      29,595   may  be  loaned. 


Totals    $216,260,    $34,405 

Total  deposits  shown,  $216,260,  is  33790  per  cent,  or  original  deposit,  $64,000. 
Total  cash  in  vaults,  $34,405,  is  53.8  per  cent,  of  original  deposit,  $64,000. 
Total  cash  in  vaults,  $34,405,  is  15.9  per  cent,  of  total  deposits  shown,  $216,260. 

Therefore,  although  53.8  per  cent,  of  the  original  deposit  is  held 
m  the  vaults  of  the  combined  banks,  the  reserve  on  the  combined 
deposits  is  only  15.9  per  cent. 

This  illustrates  our  method  of  artificially  increasing  bank  deposits 
and  their  greatest  possible  multiplication  under  our  national  system. 
The  actual  increase  is  not  so  great,  because  local  use  is  found  for 
the  greater  part  of  local  deposits.  The  method  is,  however,  extrav- 
agant of  reserves  and  encourages  expansion  on  a  fictitious  basis.  It 
demands  attention  in  the  interest  of  sound,  conservative,  and  eco- 


BANKING  REFORM  AND  CURRENCY  SECTION  245 

nomical  finance.  In  good  times,  such  as  we  have  been  having,  we 
pile  up  trouble  against  the  day  of  trouble,  when  values  shrink, 
credits  are  curtailed,  and  distrust  prevails.  The  worst  instance  of 
this  is  found  in  reciprocal  accounts  kept  for  no  other  purpose  than 
to  swell  deposits.  There  is  no  profit  in  them,  and  they  can  at  any 
time  be  wiped  out  by  offsetting  one  balance  against  the  other.  In 
periods  of  depression  they  disappear  like  the  morning  dew  before 
the  rising  sun. 

I  am  not  surprised  that  Mr.  Dawes  should  sound  a  note  of  alarm. 
But  his  remedy  was  not  practical.  He  proposed  to  change  the 
present  law  so  that  one-fifth  instead  of  three-fifths  of  the  15  per 
cent,  legal  reserve  of  banks,  not  reserve  agents,  may  consist  of 
balances  due  by  reserve  banks,  and  that  banks  in  reserve  cities  be 
compelled  to  keep  their  entire  legal  reserve  in  the  shape  of  cash  in 
their  vaults  the  same  as  those  in  central  reserve  cities  now  do.  This 
would  simply  require  the  banks,  by  legal  enactment,  to  do  delib- 
erately what  we  complain  of  their  doing  under  panic.  Were  it  once 
accomplished  the  system  might  be  permanently  put  on  a  strong  basis 
though  it  would  be  a  very  extravagant  one.  But  what  about  the 
process  of  accomplishing  it?  Could  the  system  stand  the  with- 
drawal from  the  central  reserve  cities  of  practically  all  the  deposits 
which  now  form  part  of  the  legal  reserves  of  the  banks  in  the  reserve 
cities,  and  the  withdrawal  of  two-thirds  of  the  deposits  from  the 
reserve  cities  which  form  the  legal  reserves  of  their  correspondents? 
The  question  has  only  to  be  put  to  show  the  impracticability  of  it. 
The  real  cure  is  in  branch  banking,  in  connection  with  which,  in  his 
arguments  against  it,  Mr.  Dawes  is  now  showing  as  little  practical 
knowledge  as  he  did  about  our  national  system  when  he  made  such 
a  radical  recommendation  without  realizing  the  danger  of  it. 

That  branch  banking  would  correct  this  weakness,  and  at  the 
same  time  effect  a  decided  economy,  can  be  demonstrated.  For 
this  purpose  I  have  taken  sixty  banks  in  Illinois  and  combined  them 
with  their  Chicago  correspondent,  the  First  National  Bank. 


246  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 


STATEMENT    OF    FIGURES    IN     A    SUPPOSED    COMBINATION    OF    SIXTY    ILLINOIS    NA- 
TIONAL  BANKS    WITH   THE   FIRST    NATIONAL    BANK   OF   CHICAGO,   ILLINOIS 

LIABILITIES 


Capital     

Surplus   and    undivided   profits. 

Circulation    outstanding 

Due  by  First  National  Bank  of 
Chicago  to  the  other  sixty 
Illinois    banks    (actual) 

Due  to  other  banks 

Deposits    

Other    liabilities 


First  National 
Bank  of  Chicago 


60  other  National 
Banks  in  Illinois 


Total 


$  5,000,000.00 

3.791.631.06 

942,860.00 


3,907,13443 
35,632,663.49 
32,523,650.36 

o 


$7,208,000.00 

5,052,627.77 

3,662,005.00 


Combined 


6,409,343.67 

38,060,084.42 

12,000.00 


$81,797,939-34   $60,404,060.86    $138,294,865.77 


$12,208,000.00 
8,844,258.83 
4,604,865.00 


42,042,007.16 

70,583.73478 

12,000.00 


ASSETS 


Loans,  discounts,  and  overdrafts 

United    States    bonds 

Stock,   securities,   etc 

Banking  house,  furniture  and 
fixtures     

Other  real  estate  and  mortgages 

Due  from  First  National  Bank 
of  Chicago  to  the  other  sixty 
Illinois  banks  (actual,  as  per 
contra)     

Due  from  other  banks  (eastern 
exchange)     

Cash  and  cash  items 


Total 


Eastern  Exchange. .. . 
Cash   and   cash  items. 


$45,186,515.78 
1,345,530.00 

5,849,152.45 


o 
o 


11,540,645.49 
17,876,095.62 


$81,797,939-34 


$35,061,623.66 
5,243,162.63 
3,523,244.06 

798,115.65 
223,979.89 


3,907,13443 

6,859,922.04 
4.786,878.50 


$60,404,060.86 


$80,248,139.44 
6,588,692.63 

9,372,396.51 

798,115.65 
223,97989 


18,400,567.53 
22,662,974.12 


$138,294,865.77 


16.1% 
24.8% 


^24.2% 
10.7% 


16.3% 
20.1% 


^Balances  due  from  First  National  Bank  of  Chicago  included. 

The  aggregate  cash  resources  of  the  sixty-one  would  be  the 
reserves  of  the  one  combined  without  regard  to  their  location.  The 
transfer  of  cash  from  one  branch  to  another  would  not  change  the 
total.  The  aggregate  balances  carried  in  Chicago  by  the  sixty, 
amounting  to  $3,907,13443,  would  be  eliminated,  and  their  aggre- 
gate balances  due  from  other  banks,  amounting  to  $6,859,922.04, 
would  become  part  of  the  eastern  exchange  balances  of  the  combina- 
tion.    This  combination  would  therefore  result  in  a  reduction  of 


BANKING  REFORM  AND  CURRENCY  SECTION  247 

$3,907,134.43  in  the  balances  between  banks,  without  reducing  the 
amount  of  loanable  funds,  and  at  the  same  time  $6,859,922.04  of 
eastern  exchange  could  be  converted  into  loanable  funds,  for  the 
balances  previously  carried  by  the  Chicago  bank,  amounting  to 
$11,540,645.49,  would  be  ample  for  the  purposes  of  the  combined 
bank.  You  have  only  to  combine  with  the  First  National  Bank  of 
Chicago  all  the  banks  that  keep  their  Chicago  accounts  with  it,  in 
order  to  eliminate  from  its  statement  the  entire  $35,632,663.49  which 
it  owes  to  other  banks.  And,  to  go  still  farther,  were  it  to  establish 
its  own  branches  in  New  York  and  a  few  of  the  other  principal 
eastern  cities,  it  could  be  financed  without  balances  due  to  it  by 
other  banks  except  as  to  foreign  accounts.  This  is  the  condition 
of  the  Bank  of  Montreal  and  the  other  large  Canadian  banks  with 
branches,  as  we  have  already  seen  them.  The  economy  to  the  sys- 
tem as  a  whole  in  such  a  method  of  financing  is  self-evident.  The 
borrowing  public  would  be  the  ultimate  beneficiaries  by  the  large 
increase  in  the  volume  of  loanable  funds  and  consequent  reduction 
in  rates. 

The  financing  of  the  combined  bank  being  under  central  control, 
cash  and  cash  balances  with  correspondents  could  be  switched 
around  as  circumstances  required,  without  changing  the  total.  As 
separate  institutions,  however,  not  one  of  these  sixty-one  banks  can 
of  its  own  action  increase  its  cash  on  hand  except  by  draft  on  a 
correspondent  for  the  amount,  which  to  that  extent  reduces  the  cor- 
respondent's deposits  and  cash  on  hand.  Under  ordinary  circum- 
stances this  works  no  harm.  The  demands  on  reserve  city  banks  for 
currency  shipments  are  promptly  and  cheerfully  responded  to  when 
times  are  good  and  money  is  plentiful.  But  when  shrinkage  in 
values  and  general  liquidation  set  in,  when  confidence  is  weak  and 
cash  balances  run  low,  the  effect  of  our  present  method  is  to  intensify 
the  strain  by  scattering  the  cash  reserves  of  the  system  far  and  wide 
in  small,  isolated,  and  entirely  independent  piles.  Thus  is  the  coun- 
try's financial  strength  dissipated  and  panic  produced. 

Just  the  reverse  of  this  would  be  the  result  of  concerted  action 
under  central  control.  Money  would  be  placed  where  it  was  most 
needed,  while  the  cash  on  hand  of  each  central  hank  and  all  its 
branches  would  be  made  public  without  reference  to  its  different 
locations.     A   proper  average   reserve  could   be   maintained,   as  it 


248  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

would  make  no  difference  at  which  of  the  branches  the  cash  was 
on  hand  so  long  as  the  whole  of  it  was  counted  in  the  reserves  of 
one  combined  bank.  The  withdrawal  of  money  for  the  strengthen- 
ing of  10,000  individual  banks  would  no  longer  reduce  the  reserves 
of  the  banks  in  the  reserve  cities  below  the  legal  limit,  compelling 
them  to  resort  to  clearing-house  certificates. 

As  I  have  already  stated,  the  aggregate  cash  held  by  all  the 
banks  in  the  national  system  was  $22,000,000  greater  in  1893  than 
it  was  in  1892,  notwithstanding  the  enormous  shrinkage  in  deposits 
and  the  scarcity  of  it  at  the  financial  centers.  If  all,  or  nearly  all, 
the  banks  outside  the  reserve  cities  had  been  branches  of  the  banks 
in  the  reserve  cities,  so  that  their  increased  cash  on  hand  could  have 
been  counted  as  the  reserves  of  the  branch  systems,  it  would  have 
been  seen  that  there  was  plenty  of  money  in  the  country  and  no 
occasion  for  panic.  But  practically  the  only  cash  balances  that 
received  public  attention  were  those  of  the  New  York  banks.  The 
money  was  in  the  banks  of  the  country  in  increased  amounts,  but  it 
was  not  discernible ;  there  being  no  means  of  directing  public  atten- 
tion to  it,  nor  any  method  of  showing  the  combined  reserves  of  all 
the  banks  as  the  strength  of  a  system.  This  is  virtually  an  admis- 
sion that  in  reality  we  have  no  system,  but  10,000  unit  banks  under 
independent  management,  each  acting  for  itself  without  regard  to 
the  effect  of  its  action  on  the  others. 

Under  the  branch-banking  system  the  cash  reserves  are  kept 
principally  in  the  financial  centers,  or  redemption  cities.  They  are 
seldom  or  never  needed  outside  of  them,  the  transactions  of  whole 
sections  being  cleared  daily  at  these  centers  with  great  economy  of 
both  money  and  work.  Under  our  system,  in  small  communities 
banks  are  started  with  $25,000  capital.  In  the  event  of  the  failure 
of  some  local  industry,  depositors  become  alarmed.  They  have  no 
difficulty  in  gauging  the  strength  of  their  bank.  They  know  the 
amount  of  its  small  capital  and  smaller  available  resources.  They 
conclude  that  it  would  not  take  much  to  break  it,  and,  proceeding  to 
withdraw  their  deposits,  they  accomplish  by  their  own  action  the  very 
thing  they  feared  would  happen.  The  matter  is  largely  one  of  confi- 
dence. Branches  of  large  banks  establish  such  confidence  that  alarm 
is  not  easHy  taken  and  runs  are  unknown.  Small  branches  can,  there- 
fore, be  managed  with  great  economy  in  the  matter  of  cash  reserves. 


BANKING  REFORM  AND  CURRENCY  SECTION 


249 


Where  there  is  an  issue  of  assets  currency  in  connection  with 
branch  banking,  as  there  frequently  is,  the  branches  are  virtually 
circulating  agencies  of  the  parent-bank's  notes,  and  the  entire  cir- 
culating medium  for  the  district  is  satisfactorily  provided  through 
them.  On  the  other  hand,  it  is  well  known  that  our  small  banks 
cannot  supply  the  borrowing  requirements  of  the  larger  industries 
in  their  location.  The  legal  restriction  put  upon  their  loaning  power 
makes  it  impossible  for  them  to  do  so.  This,  notwithstanding  that 
many  of  them  have  to  look  outside  their  own  localities  for  the 
investment  of  their  surplus  funds.  In  consequence  of  this,  it  has 
become  the  practice  for  the  larger  manufacturing  concerns  and 
business  houses  to  place  their  paper  through  brokers  in  the  financial 
centers.  With  too  many  of  such  concerns  credit  is  no  longer  based 
on  a  proper  understanding  with  their  bankers,  but  depends  on  the 
ability  of  their  brokers  to  sell  their  paper,  in  such  amounts  as  the 
various  markets  in  which  it  is  offered  will  absorb.  There  is  prac- 
tically no  check  on  the  amount  issued  outside  of  the  limit  of  the 
market  for  it.  This  is  a  serious  defect,  begotten  of  conditions  pro- 
duced by  our  system  of  individual  banks.  Under  a  branch-bank 
system  surplus  funds  are  taken  from  one  locality  and  loaned  in 
another,  under  the  direction  of  the  general  management.  Through 
central  control,  the  branches  would  thus  be  able  to  supply  the  entire 
borrowing  requirements  of  their  different  localities  at  the  current 
rates  of  discount  prevailing  in  the  centers.  They  would  have  local 
use  for  their  own  funds,  and  if  more  could  be  legitimately  used  they 
would  be  supplied  from  headquarters.  We  should  no  longer  find 
the  paper  of  some  concerns  offered  in  half  a  dozen  different  markets 
by  as  many  different  brokers.  Bankers  would  get  into  closer  touch 
with  borrowers  and  have  a  better  knowledge  of  what  they  are  doing 
for  them.  This  would  not  only  be  better  banking,  but  would  be 
much  better  for  the  borrowers  themselves,  who  could  make  all  their 
financial  arrangements  at  home,  and  have  such  arrangements  as 
could  be  relied  on.  Good  customers  who  want  only  what  they  are 
legitimately  entitled  to,  and  what  any  bank  in  a  position  to  do  so 
would  gladly  grant  them,  would  certainly  prefer  this.  Good  bor- 
rowers would  thus  be  properly  taken  care  of  and  the  plungers 
exterminated. 

There  are  many  other  advantages  connected  with  branch  bank- 


250 


PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 


ing — such  as  economy  in  the  expense  of  management ;  better  oppor- 
tunities from  a  professional  standpoint  of  training  young  men  for 
the  business;  greater  encouragement  for  young  men  to  engage  in 
the  business  as  a  final  calling,  a  managership  being  within  the  reach 
of  everyone  of  ordinary  ability  and  industry. 

Such,  from  my  point  of  view,  with  a  practical  experience  of 
both  systems,  are  some  of  the  advantages  to  be  gained  by  the  adop- 
tion of  branch  banking.  I  am  far  from  holding  it  up  as  a  cure  for 
all  the  ills  that  bankers  are  heir  to.  Branch  bankers  have  their 
troubles  just  as  we  have  ours.  Nor  am  I  blind  to  the  advantages 
of  our  national  system  as  advocated  by  its  admirers.  There  is 
something  in  the  argument  of  the  interest  which  each  community 
takes  in  its  own  institutions,  and  the  benefit  of  having  a  bank  under 
local  control  to  build  up  local  industries.  I  have  read  with  much 
interest  Mr.  Frame's  criticism  of  some  of  the  views  expressed  at 
the  convention  of  the  American  Bankers'  Association  held  here  last 
October.1  It  is  an  able  paper  and  carries  conviction  with  it  in  many 
particulars.  But  with  the  conclusions  at  which  he  arrives,  as  tersely 
stated  in  the  few  words  he  addresses  to  the  bankers  of  the  United 
States,  I  cannot  agree.  He  says :  "Branch  banking  means  monopoly. 
Monopoly  means  revolution  in  banking.  Are  you  ready  to  sur- 
render?" I  am  as  much  opposed  to  monopoly  and  revolution  as  he 
can  possibly  be.  Branch  banking  does  not  mean  monopoly,  and  I 
believe  it  can  be  brought  about  by  evolution  and  without  revolution. 
Competition  would  be  keener  through  the  country  under  branch 
banking  than  it  is  now.  Branches  are  established  in  every  village 
in  Canada,  and  in  many  towns  there  are  more  branches  than  one 
where  a  $25,000  national  bank  under  our  system  could  barely  exist. 
There  is  no  intention,  nor  would  there  be  opportunity,  of  having  the 
whole  absorbed  by  one  which  would  be  monopoly.  Even  with  a 
branch-bank  system  we  must  always  have  a  large  number  of  banks 
competing  for  the  enormous  business  of  this  country.  Mr.  Frame 
admits  this  when  he  says : 

As  Great  Britain  has  129  great  banks  with  over  5,500  branches,  his  (Mr. 
Stickney's)    parallel    for   the   United    States    would    indicate,    say,    250   large 
central  banks  with  more  than  10,000  others  as  tails  to  the  big  kites.     In  short, 
his  scheme  was  simply  to  revolutionize  our  banking  system. 
This  is  surely  not  monopoly  that  he  thus  describes,  but  active  com- 

1  This  article  was  published  in  the  Banker's  Magazine  under  the  title, 
"Branch  Banking  and  Asset  Currency,"  December,  1901. 


BANKING  REFORM  AND  CURRENCY  SECTION  251 

petition  among  250  kites  with  10,000  tails  all  flying  for  business. 
In  regard  to  revolutionizing  the  system,  my  imagination  does  not 
follow  Mr.  Frame's  prediction,  for  where  he  sees  the  sudden 
upheaval  and  quick  action  of  revolution  I  can  see  only  the  slow  and 
gradual  process  of  evolution — a  process  extending  over  at  least  a 
generation,  and  probably  a  century  or  more.  The  permission 
granted  to  national  banks,  under  proper  restrictions,  to  establish 
branches  cannot  immediately  change  five  thousand  of  the  existing 
banks  into  branches  of  the  remaining  five  hundred.  Consolidation 
and  absorption  are  matters  of  negotiation  and  bargain,  and  there- 
fore slow  and  gradual  as  conditions  change  and  opportunity  occurs. 
It  always  has  been  so.  In  England  the  evolution  from  individual 
local  banks  to  branch  systems  has  been  in  progress  for  a  hundred 
years  and  is  still  in  operation.  In  Canada  the  system  has  been  one 
of  gradual  development,  and  there  still  remain  local  banks  actively 
competing  with  branches  for  the  business  of  their  localities. 

One  of  the  first  official  acts  of  any  importance  assigned  to  me, 
twenty-five  years  ago,  was  the  examination  of  the  Union  Bank  of 
Prince  Edward  Island  in  contemplation  of  its  consolidation  with 
the  Bank  of  Nova  Scotia.  The  merger  was  accomplished,  and 
since  that  time  the  Bank  of  Nova  Scotia  has  had  its  branch  in 
Charlottetown  competing  with  the  branches  of  other  large  banks 
and  with  the  Merchants  Bank  of  Prince  Edward  Island,  another 
local  institution  which  has  retained  its  local  organization  and  indi- 
viduality with  a  capital  of  $300,000,  on  which  it  pays  8  per  cent, 
dividend.  Later  I  was  called  upon  to  establish  a  branch  of  the 
same  bank  in  Liverpool,  N.  S.,  on  the  ruins  of  two  local  institutions 
which  went  into  enforced  liquidation  in  consequence  of  local  business 
conditions  beyond  their  control.  Still  later  I  undertook  the  pre- 
liminary negotiations  for  the  establishment  of  branches  at  St. 
Stephen  and  Fredericton,  N.  B.,  where,  in  the  former,  the  St. 
Stephen's  Bank,  with  a  capital  of  $200,000,  had  for  many  years  done 
business  and  is  still  in  existence,  paying  5  per  cent,  dividends ;  and 
in  the  latter,  the  People's  Bank  of  Fredericton  had  for  many  years 
done  business  and  is  still  active  with  a  capital  of  $180,000,  on  which 
it  pays  8  per  cent,  dividends. 

In  Yarmouth,  N.  S.,  a  branch  has  been  in  existence  for  three- 
fourths  of  a  century,  competing  with  two  local   banks,  one  with 


252    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

$300,000,  the  other  with  $264,000  capital,  on  which  they  each  pay  5 
per  cent,  dividends.     In  Windsor,  N.  S.,  the  Commercial  Bank,  a 
local  institution,  held  the  field  entirely  to  itself  for  more  than  a 
quarter  of  a  century  with  a  capital  of  $350,000,  on  which  it  pays  6 
per  cent,  dividends.     In  St.  John,  N.  B.,  the  Bank  of  New  Bruns- 
wick, until  within  the  last  few  years  a  purely  local  institution,  has 
done  business  on  a  capital  of  $500,000,  in  competition  with  branches 
of  the  largest  banks  in  Canada,  and  pays  12  per  cent,  dividends.     In 
other  places  through  Canada  local  banks  are  actively  competing  with 
branches  of  the  large  banks.     Comparatively,  however,  they  operate 
at  a  disadvantage  from  the  standpoint  of  economy,  and  are  not 
therefore  so  remunerative  on  capital  invested  as  are  the  large  banks. 
These  matters  I  recall  from  my  personal  knowledge  and  expe- 
rience; and,  after  all,  experience  is  a  better  guide  than  theory.     I 
mention  them  to  show  that  no  such  thing  is  likely  to  occur  as  that 
predicted  by  Mr.  Frame.     He  anticipates  that  "the  10,000  banks  in 
the  United  States  will  have  a  monopolistic  brood  of  250  great  cen- 
tral banks  politely  or  otherwise  saying  to  them:  'Either  sell  out  or 
get  out  of  business.'  "     The  facts  are  that  local   institutions   will 
neither  have  to  sell  nor  to  get  out  of  business,  unless  they  deem  it 
to  their  advantage  to  do  the  one  or  voluntarily  do  the  other.     With 
the  deposits  of  their  localities  in  their  hands,  and  with  local  interest 
and  influence  to  support  them,  they  would  be  in  absolute  control  of 
the  situation.     In  any  negotiations  looking  to  consolidation  or  the 
purchase  of  their  business  they  would  hold  the  commanding  position 
and  would  be  well  fortified  to  protect  their  rights.     They  would 
have  the  good-will  of  an  established  business,  the  value  of  which 
they  would  no  doubt  know.     They  could  retain  it  and  continue  in 
business,  or  they  could  dispose  of  it  when  they  got  ready  at  a  com- 
petitive price;  for  they  would  have  more  than  one  central  bank  to 
dicker  with.     The  officers  would  practically  retain  their  positions 
and  their  standing  in  the  community,- as  their  connection  with  the 
business  would  necessarily  have  to  be  maintained.     Each  individual 
case  would  have  to  be  dealt  with  on  its  merits,  and  I  see  no  reason  to 
fear  that  the  rights  of  any  individual  or  institution  would  be  disre- 
garded or  interfered  with.     Changes  in  methods  and  systems  natu- 
rally beget  fears  and  misgivings,  and  it  would  be  strange  if  such  an 
important  suggestion  as  this  did  not  produce  them.     I  see  no  cause 


BANKING  REFORM  AND  CURRENCY  SECTION  253 

for  apprehension,  however,  as  I  see  no  reason  to  believe  that,  were 
the  power  granted  to  banks  in  this  country  to  open  branches,  the 
result  would  be  any  different  from  that  which  experience  has  shown 
it  to  be  in  other  countries  where  the  system  has  been  adopted.  We 
have  no  banks  to-day  so  equipped  that  they  could  start  branches 
except  in  the  most  initiatory  manner. 

The  only  possible  way  the  system  could  be  developed  would  be 
by  the  slow  process  of  consolidation  with  such  banks  as  might  be 
willing  to  negotiate  toward  that  end.  That  would  mean  one  deal 
at  a  time,  and  unless  both  were  willing  there  could  be  no  merger. 
That  it  would  come  about  by  gradual  evolution,  if  it  were  permitted, 
I  do  not  doubt.  For,  although  prejudice  and  individual  interests 
might  retard  it.  these  would  be  overcome  when  the  public  became 
familiar  with  the  great  advantages  of  the  system. 

There  does  not  seem  to  me  to  be  room  for  question  that  the 
branch  system  would  serve  the  public  better  than  our  present  system 
does ;  that  it  would  be  stronger,  safer,  more  economical,  furnish  a 
much  larger  volume  of  loanable  funds  from  the  same  amount  of 
resources,  provide  better  facilities  for  collections  and  domestic 
exchange,  and  therefore  reduce  the  current  rates  of  discount  and 
other  charges,  and  so  distribute  loanable  funds  that  the  rate  of  dis- 
count would  be  practically  the  same  from  one  end  of  the  country  to 
the  other.  It  would  be  another  case  of  the  survival  of  the  fittest. 
It  seems  to  me  a  perfectly  natural  evolution  from  our  present  sys- 
tem, and  one  that  must  come  about  sooner  or  later.  It  has  already 
commenced  in  Greater  New  York.  The  Colonial  Bank,  closely 
allied  with  the  Hanover  National,  has  five  or  six  branches ;  the  New 
York  Produce  Exchange  Bank  has  four;  the  Corn  Exchange  Bank 
has  ten  and  is  shortly  to  open  another.  This  suggests  another 
advantage  of  the  system  to  the  public — the  establishing  of  branches 
in  convenient  localities  in  the  large  cities.  Branches  of  the  large 
banks  are  scattered  all  over  London  for  the  convenience  of  the  pub- 
lic, and  in  the  other  large  cities  of  Great  Britain  and  Canada  the 
same  system  prevails.  If  we  in  Chicago  had  even  the  power  to 
establish  branches  in  our  own  city,  what  a  great  convenience  to  the 
public  it  would  be !  We  have  customers  coming  for  miles  in  all 
directions  to  do  their  business  on  Dearborn,  Monroe,  and  La  Salle 


254    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

Streets,  where  we  are  all  huddled  together  without  any  regard  to  the 
convenience  of  our  patrons. 

My  subject,  branch  banking,  does  not  necessarily  involve  assets 
currency.  We  can  have  the  one  without  the  other.  In  closing, 
however,  I  desire  to  say,  without  argument,  that  much  as  I  should 
like  to  see  assets  currency  become  a  part  of  the  banking  system  of 
this  country,  I  have  never  been  able  to  make  up  my  mind  that  it 
could  be  safely  or  satisfactorily  connected  with  our  present  system. 
To  me  the  simple  statement  that  about  10,000  banks,  with  capitals 
running  all  the  way  from  $25,000  to  $25,000,000,  would  have  the 
privilege  of  issue,  settles  it  as  impractical  and  impossible.  Proper 
facilities  for  its  redemption  are  impossible,  and  proper  provisions  for 
its  safety  are  equally  impossible.  No  such  scheme  has  ever  been 
successfully  attempted  in  the  world's  history,  and  no  such  conglomer- 
ation of  credit  obligations  was  ever  floated  in  the  name  of  a  mone- 
tary circulation.  The  first  essential  for  a  safe  assets  currency  is  large 
capitalization  of  the  individual  banks  that  issue  it,  and  the  second,  of 
equal  importance,  is  ample  facilities  for  its  prompt  redemption,  not 
only  at  the  counter  of  the  bank  that  issues  it,  but  in  the  financial 
center  of  every  state  in  the  Union.  Neither  of  these  could  be  ade- 
quately provided  under  our  present  system.  I  would  therefore 
suggest  that  we  drop  the  question  of  assets  currency  until,  by  per- 
mitting our  large  banks  to  establish  branches,  we  develop  a  system 
that  will  be  able  to  support  it. 


BRANCH  banking- 
addresses  DELIVERED  BY   HORACE  WHITE,  OF  NEW  YORK,  AND   HENRY  W.   YATES, 
OF    OMAHA,    IN    DEBATE    BEFORE    THE    JOINT    CONVENTION    OF    THE    MISSOURI, 
KANSAS,    OKLAHOMA,    AND     INDIAN     TERRITORY     BANKERS'    ASSOCIATIONS,    IN 
MAY,    1902. 

Remarks  by  Horace  White: — 

Let  us  begin  by  defining  the  phrase  branch  bank.  It  is  oftenest 
used  to  signify  an  office  having  no  independent  capital  of  its  own, 
which  belongs  to,  but  is  geographically  separated  from,  a  bank. 
The  branch  is  thus  separated  from  the  bank  in  order  to  attract  cus- 


BANKING  REFORM  AND  CURRENCY  SECTION  255 

tomers  who  live  at  a  greater  or  less  distance  from  the  head  office — 
for  the  same  reason  that  a  drug  store  down-town  may  find  it  profit- 
able to  establish  a  branch  up-town.  The  credit  of  the  parent  bank 
always  attaches  to  the  branch  bank,  but  the  capital  may  or  may  not 
be  with  it.  More  capital  may  be  collected  at  the  branch  in  the  form 
of  deposits  than  can  be  profitably  used  there.  In  that  event  the 
surplus  will  be  drawn  to  the  parent  bank.  Most  probably,  however, 
there  will  be  times  when  the  head  office  will  be  sending  money  to 
the  branch,  and  other  times  when  it  will  be  drawing  money  from  it. 
The  sole  reason  for  branch  banking  is  that  this  flow  and  counter- 
flow  may  take  place  according  to  the  needs  of  business,  with  the 
least  loss  of  time,  with  the  smallest  amount  of  friction,  and  hence 
with  the  greatest  profit  to  the  bank. 

The  phrase  branch  banking  is  also  applied  to  a  group  of  banks, 
each  of  which  has  a  capital  of  its  own,  but  all  of  which  are  under  a 
common  management.  If  such  a  group  is  situated  in  a  single  coun- 
try, under  modern  conditions  of  rapid  communication,  the  modus 
operandi  will  be  the  same  as  in  the  other  case.  If  they  are  in 
separate  countries,  however,  there  must  be  an  assignment  of  a  cer- 
tain amount  of  capital  to  each  of  the  branches  in  order  to  save  time 
and  expense  in  transferring  funds  from  one  to  the  other. 

There  is  a  wide  diversity  of  opinion  in  this  country  as  to  the 
advisability  of  branch  banking,  and  this  diversity  exists  largely 
among  bankers  themselves.  The  mass  of  the  people  know  nothing 
about  it,  and  few  of  them  care  enough  about  it  to  study  the  ques- 
tion. The  doctrinaires,  the  college  professors,  the  economists,  are 
generally  in  favor  of  branch  banking.  They  are  not,  however,  so 
far  as  I  know,  in  favor  of  forcing  that  system  upon  the  national 
bankers  against  their  will.  If  I  were  a  banker,  and  if  I  believed 
that  branch  banking  would  injure  my  business,  I  should  be  opposed 
to  it,  and  especially  if,  while  holding  such  views,  I  were  a  trustee 
of  bank  capital  for  other  people.  Whether  branch  banking  be  con- 
ducive to  the  general  interest  or  otherwise,  it  is  not  a  soul-stirring 
matter.  Patriotism  is  not  concerned  in  promoting  it.  Some  people 
think  that  patriotism  is  concerned  in  opposing  it,  and  that  branch 
banks,  if  permitted  to  exist,  will  destroy  American  liberty.  Such 
persons  do  right  to  oppose  it.  Those  who  think  thai  it  would  be,  on 
the  whole,  a  wise  policy  for  the  country,  agree  that  they  have  no 


256  PRACTICAL  PRORLEMS  IN  BANKING  AND  CURRENCY 

special  claim  on  the  public  attention,  and  I,  for  one,  do  not  believe 
that  branch  banking  will  ever  be  adopted  by  Congress  until  the 
majority  of  bankers  acquiesce  in  it.  Nevertheless,  I  believe  that  it 
will  come,  because  I  believe  that  it  will  be  economical  and  profitable 
to  all  banks  in  both  city  and  country,  and  that  it  will  extend  and 
enlarge  instead  of  crippling  their  business,  and  that  after  trying  it 
they  will  wonder  why  they  were  ever  opposed  to  it. 

It  is  a  matter  of  history  that  when  the  country  banks  of  New 
England  were  asked  to  redeem  their  notes  at  the  Suffolk  Bank  in 
Boston,  and  to  pay  the  Suffolk  a  small  compensation  for  its  trouble, 
they  declared  and  sincerely  believed  that  such  a  policy  would  ruin 
them.  Yet  after  a  trial  of  the  system  they  found  their  credit  so 
much  improved  and  their  circulation  so  much  extended,  that  noth- 
ing could  have  induced  them  to  abandon  it.  So,  too,  I  think  that  it 
would  have  been  impossible  for  anybody  to  tell  beforehand  what 
would  be  the  consequences  and  effect  of  branch  banking.  For  my 
own  part,  I  know  of  no  way  to  judge  the  future  but  by  the  past.  I 
feel  sure,  however,  that  what  has  happened  before  will  happen  again 
under  like  conditions,  and  that  what  branch  banking  does  in  other 
civilized  countries  it  will  do  here  if  the  opportunity  is  offered. 

We  had  five  examples  of  branch  banking  in  our  own  country 
before  the  civil  war.  These  groups  of  banks  had  one  hundred  and 
one  branches.  They  existed  at  various  times  from  the  foundation 
of  the  government  to  the  end  of  the  civil  war,  during  a  period  of 
great  disorder  in  banking,  amounting  at  times  to  financial  chaos. 
There  were  five  general  bank  suspensions  from  1791  to  1861.  Not 
one  of  these  banks  or  branches  failed  during  that  period.  Now  the 
test  of  solvency  is  the  supreme  test  of  banking,  and  if  we  find  a 
particular  system  that  passes  this  test  for  three-quarters  of  a  century 
while  failures  of  individual  banks  are  frequent  and  disastrous,  we 
may  reasonably  infer  that  this  immunity  is  due,  in  part  at  least,  to 
the  system  itself.  This  is  not  saying  that,  under  the  branch  system, 
banks  never  fail — there  have  been  two  or  three  bad  failures  of  such 
banks  in  Scotland;  but  we  may  fairly  infer  that  the  people  have 
greater  confidence  in  a  group  of  banks  linked  together  and  co-operat- 
ing with  each  other  than  they  have  in  the  same  number  of  banks 
separate  from  and  competing  with  each  other.  Public  confidence  is 
the  sine  qua  non  of  successful  banking,  and  the  system  which  best 


BANKING  REFORM  AND  CURRENCY  SECTION  257 

assures  such  confidence  is  the  one  which  should  receive  our  favor. 

We  will  now  glance  at  the  experience  of  other  countries,  and 
first  at  that  of  our  neighbors  on  the  north.  In  Canada  there  are 
thirty- four  banks  with  an  aggregate  capital  of  $67,591,000  and  a 
surplus  of  $37,365,000.  Thus  the  average  capital  is  $2,000,000,  and 
the  average  surplus  $1,000,000  to  each  bank.  No  new  bank  can  be 
established  with  less  than  $500,000  subscribed,  of  which  at  least 
$250,000  must  be  paid  before  beginning  business.  All  of  the  larger 
banks  have  branches,  of  which  there  are  690  in  the  Dominion,  situ- 
ated in  392  localities.  Each  bank  is  allowed  to  issue  notes  to  an 
amount  equal  to  its  paid  capital,  but  competition  and  the  prompt 
return  of  the  notes  for  redemption  have  always  kept  the  circulation 
below  the  authorized  amount.  All  banks  are  required  by  law  to 
make  arrangements  to  insure  the  par  value  of  their  circulation  in 
any  and  every  part  of  Canada,  and  for  this  purpose  to  establish 
redemption  agencies  at  the  chief  cities  of  each  of  the  seven  provinces 
and  at  such  other  places  as  may  be  determined  by  the  treasury  board. 
In  practice  the  notes  of  the  different  banks  are  exchanged  daily  at 
the  clearing-houses  in  the  larger  cities.  At  other  places  they  are 
exchanged  between  the  nearest  branches,  and  balances  are  paid 
either  in  Dominion  notes  or  by  drafts  on  the  commercial  centres. 
There  is,  accordingly,  no  discount  on  any  Canadian  bank  note  in  any 
part  of  the  Dominion.  Nor  is  there  any  discount  on  the  notes  of 
failed  banks.  The  law  provides  for  the  protection  of  noteholders 
(1)  by  giving  them  a  prior  lien  on  all  the  assets  of  failed  banks, 
including  a  double  liability  of  the  shareholders ;  (2)  by  a  bank  cir- 
culation redemption  fund  contributed  by  all  the  banks,  equal  to  5 
per  cent,  of  the  average  circulation  of  each;  and  (3)  by  a  provision 
that  the  notes  of  failed  banks  shall  draw  5  per  cent,  interest  from 
the  time  of  default  till  public  announcement  is  made  of  readiness 
to  redeem  them.  There  have  been  three  bank  failures  since  1890, 
when  these  provisions  of  law  took  effect,  but  the  noteholders  lost 
nothing;  nor  did  the  other  banks  lose  anything  from  the  common 
redemption  fund. 

The  Canadian  system  of  branches  tends  to  equalize  the  rates  of 
interest  in  different  parts  of  the  Dominion.  A  bank  receiving 
deposits  in  Halifax,  Montreal,  and  Toronto  may  lend  them  the  fol- 
lowing day  through  its  branches,  and  by  the  issue  of  its  own  notes, 
17 


258  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

at  Winnipeg-,  Vancouver,  and  Victoria,  the  branches  redeeming  the 
notes  by  drafts  on  the  head  office.  The  rate  of  interest  in  the  smaller 
towns  of  the  West  is  only  1  or  2  per  cent,  higher  than  in  the  large 
cities  of  the  East  on  the  same  kind  of  loans.  To  this  equalization 
of  the  rate  of  interest  both  the  branch  system  and  the  freedom  of 
note  issue  contribute.  Under  the  branch  system  in  Canada  the 
parent  bank  is  like  a  reservoir  having  pipes  of  different  sizes  running 
to  different  consumers,  each  of  whom  can  draw  as  much  from  the 
general  supply  as  he  can  advantageously  use  and  give  security  for. 
The  country  in  which  branch  banking  has  received  the  highest 
development,  however,  is  Scotland.  There  are  ten  banks  in  that 
country  with  an  aggregate  capital  of  $46,000,000  and  a  surplus  of 
$35,000,000.  The  capital  and  surplus,  if  equally  distributed  among 
them,  would  be  $8,000,000  each.  They  have  all  together  1,065 
branches.  One  of  these  banks,  the  Commercial,  whose  head  office 
is  in  Edinburgh,  has  139  branches,  and  thirteen  of  these  are  in  the 
city  of  Glasgow.  The  Union  Bank,  whose  head  office  is  at  Glas- 
gow, has  143  branches,  and  ten  of  these  are  in  Edinburgh.  This 
system  has  grown  up  during  the  past  two  hundred  years  to  its  pres- 
ent perfected  state.  It  has  met  some  disasters  in  that  time,  but  com- 
paratively few.  There  have  been  only  three  bank  failures  of  any 
importance  in  Scotland — that  of  the  Ayr  Bank  in  1792,  of  the  West- 
ern Bank  in  1857,  and  of  the  City  of  Glasgow  Bank  in  1878.  All 
of  these  failures  were  due  to  speculations  of  a  most  disreputable 
kind,  carried  on  with  the  money  of  the  banks  by  the  connivance  of 
the  directors.  By  means  of  this  branch  system  deposits  are  secured 
from  every  nook  and  corner  of  the  country,  and  capital  is  transferred 
easily  and  quickly  to  the  places  where  the  demand  for  it  is  great- 
est. There  is  no  hamlet  so  small  that  it  cannot  obtain  banking 
facilities  adapted  to  its  needs.  Whatever  assistance  banks  can  give 
to  industry,  is  available  to  the  poor  and  the  rich  on  equal  terms.  In 
no  other  country,  except  possibly  in  France,  has  the  doctrine  of 
equality  in  bank  favors  been  carried  so  far.  If  I  were  asked  to 
name  the  countries  where  the  democratic  principle  has  reached  its 
widest  application  in  the  matter  of  loans  and  discounts,  I  should 
name  those  where  the  branch-bank  system  has  received  its  highest 
development  and  has  been  pushed  to  the  greatest  extreme.  And 
here  Scotland  would  stand  in  the  front  rank.  If  I  were  asked  to  name 


BANKING  REFORM  AND  CURRENCY  SECTION 


259 


the  country  where  agriculture  has  received  and  still  receives  the  great- 
est help  from  banks,  I  should  name  Scotland.  The  branch  bank  ad- 
joins the  inglenook  everywhere,  and  "cash  credits"  are  available  for 
every  farmer  of  good  character.  A  cash  credit  is  a  permission 
extended  by  the  bank  to  a  borrower  to  draw  money  as  it  is  wanted, 
not  exceeding  a  certain  sum,  paying  interest  for  the  time  and  amount 
actually  used.  As  a  corollary  to  the  cash  credit  system  the  bank 
allows  interest  on  all  deposits,  and  thus  the  habit  of  saving  is  stimu- 
lated among  the  people. 

The  circulating  notes  of  the  Scotch  banks  are  exchanged  daily  at 
the  Edinburgh  Clearing-house,  and  settlements  are  made  between 
banks  by  drafts  on  London.  No  deposited  security  for  bank  notes 
has  ever  been  required  in  Scotland,  but  noteholders  have  a  prior 
lien  on  the  assets,  and  the  liability  of  shareholders  for  note  issues 
is  unlimited.  For  these  reasons  the  note  issues  of  insolvent  banks 
in  Scotland  are  always  accepted  at  par  by  the  other  banks,  and  are 
never  depreciated.  Although  deposits  are  received  and  loans  are 
made  at  each  branch,  the  branches  pay  out  only  the  notes  of  the 
parent  bank,  which  are  redeemable  at  the  head  office.  So  it  is  neces- 
sary to  have  real  money  only  in  one  place,  instead  of  one  hundred 
different  places. 

The  Bank  of  France  is  required  by  law  to  have  at  least  one  branch 
in  each  of  the  eighty-seven  departments  into  which  the  country  is 
divided.  It  has  now  392  branches.  Some  of  these  are  subsidiary 
offices  in  places  too  small  to  support  a  branch  with  the  usual  com- 
plement of  officers  and  employees.  In  some  places  the  branch  or 
office  is  only  desk-room,  is  open  only  once  or  twice  a  week,  and  is 
served  by  an  agent  who  serves  other  branches  on  other  days.  The 
rate  of  discount  is  uniform  at  the  parent  bank  and  at  all  branches 
and  offices.  During  recent  years  it  has  been  usually  2j^  to  4  per 
cent.,  and  is  less  fluctuating  than  in  any  other  country.  No  paper 
is  rejected  on  account  of  its  smallness.  Loans  of  five  francs  are 
not  uncommon.  In  1889  there  were  at  the  parent  bank  nearly 
20,000  discounts  of  ten  francs  ($1.93)  or  less  each,  and  more  than 
1,000,000  ranging  in  size  from  51  to  100  francs. 

The  Bank  of  France  has  a  monopoly  of  note  issue,  and  its  notes 
are  what  we  call  "asset  currency."  Its  present  circulation  is  about 
$800,000,000,  and  its  specie  holdings  $720,000,000,  of  which  $500,- 


260  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

oeo.ooo  is  gold.  It  is  much  the  largest  bank  in  the  world.  Its 
assets  and  liabilities  foot  up  one  billion  dollars.  Yet  it  has  numer- 
ous competitors  in  its  own  territory,  among  them  the  Credit  Lyon- 
nais,  with  a  capital  of  $50,000,000.  The  Credit  Lyonnais  has 
twenty-six  branches  in  Paris  and  its  suburbs,  116  in  the  depart- 
ments, and  twenty-six  in  foreign  countries. 

The  Imperial  Bank  of  Germany  has  320  branches.  It  has  the 
right  to  issue  $110,000,000  of  circulating  notes,  regardless  of  its 
cash  reserve.  It  may  issue  as  many  more  as  it  has  cash  on  hand, 
and  as  many  above  that  figure  as  it  chooses,  by  paying  a  tax  at  the 
rate  of  5  per  cent,  per  annum  on  the  excess,  until  it  has  outstanding 
three  dollars  of  notes  to  one  dollar  of  cash.  The  latter  is  what  we 
call  "emergency  circulation,"  and  the  bank  has  several  times  availed 
itself  of  its  permission  to  issue  it,  to  the  great  benefit  of  the  business 
community,  and  incidentally  to  the  imperial  treasury.  There  is 
nothing  in  the  branch-bank  system  of  Germany,  however,  that  calls 
for  special  attention. 

I  might  go  on  and  recite  the  experience  of  other  countries,  but 
we  should  find  no  novelty  among  them.  In  the  year  1896  our  gov- 
ernment called  for  reports  from  its  diplomatic  agents  on  the  bank- 
ing system  of  other  countries,  and  asked  specifically  whether  branch 
banking  was  allowed  in  them.  Replies  were  received  from  forty 
different  countries,  and  all  of  them  said  that  branch  banking  was 
permitted,  and  in  most  of  them  practiced.  Of  course,  it  would  not 
be  practiced  if  it  were  not  profitable.  If  it  is  profitable  in  Canada, 
in  Great  Britain,  and  on  the  continent  of  Europe,  it  would  probably 
be  so  here.  So  the  question  before  us  is  whether  the  law  ought  to 
prohibit  a  kind  of  banking  which  would  be  advantageous  to  the  per- 
sons engaged  in  it,  which  is  not  dishonorable  in  itself,  which  is 
practiced  in  all  other  countries,  and  which  was  extensively  practiced 
here  before  the  National  Bank  Act  was  passed. 

It  may  be  said  that  if  branch  banking  were  permitted,  the  large 
banks  would  open  branches  in  the  small  towns  and  take  away  the 
business  of  existing  banks.  They  could  do  so  only  by  offering  loans 
at  lower  rates  to  the  business  community,  or  by  giving  them  better 
terms  in  exchange  for  their  deposits.  Competition  is  always  incon- 
venient, and  we  need  not  expect  to  make  it  look  attractive  to  any 
class,  whether  bankers  or  other ;  but  competition  is  not  to  be  avoided 


BANKING  REFORM  AND  CURRENCY  SECTION  261 

by  preventing  branch  banking  under  the  national  system.  New 
state  banks  are  starting  up  all  the  time  in  places  where  national 
banks  exist.  I  have  a  book  which  tells  how  Mr.  W.  S.  Witham, 
of  Atlanta,  Georgia,  has  started  twenty-six  banks  as  branches  of  a 
parent  bank  in  Atlanta,  of  which  he  is  the  president.  These  are  not 
national  banks,  but  they  are  competing  banks  all  the  same.  They 
get  deposits  and  they  make  loans.  These  branches  are  managed  by 
local  directors,  just  as  tho  branches  of  the  State  Bank  of  Indiana 
were  in  the  olden  time ;  but  Mr.  Witham  is  the  president  of  each 
branch  and  he  appoints  the  cashier  of  each. 

This,  however,  is  only  a  symptom  of  a  mightier  movement  in 
the  way  of  bank  extension  now  going  on.  Scarcely  a  day  passes 
that  we  do  not  read  of  some  existing  bank  passing  under  the  con- 
trol of  a  larger  one.  During  the  last  six  months  there  has  been 
much  quiet  absorption  of  small  banks  in  New  York  City  by  large 
ones,  and  latterly  the  process  has  been  extended  to  banks  outside  of 
the  city  and  outside  of  the  state.  Not  only  so,  but  some  of  the 
large  banks  in  cities  far  distant  from  each  other  have  been  exchang- 
ing shares  through  the  persons  of  men  who  own  controlling  inter- 
ests in  each.  A  bank  president  from  an  interior  town  in  Missouri, 
which  contains  two  banks,  was  in  New  York  a  few  days  ago  in 
order  to  arrange  for  an  affiliation  with  one  of  the  large  city  banks. 
He  had  heard  that  his  competitor,  which  we  will  call  Bank  A,  was 
negotiating  for  an  affiliation  of  this  kind,  and  he  did  not  intend  to 
be  caught  napping.  He  wanted  to  be  able  to  say  at  once  that  his 
bank  (Bank  B)  had  just  as  strong  connections  as  Bank  A.  Why 
did  Bank  A  desire  to  establish  relations  of  this  kind  with  a  large  city 
bank?  Because  it  believed  that  it  would  acquire  more  importance 
in  the  eyes  of  the  community  and  get  a  larger  line  of  deposits  there- 
by. Other  things  being  equal,  the  depositor  puts  his  money  in  the 
strong  bank,  because  he  considers  it  safer.  No  bank  likes  to  lose 
its  relative  importance  in  the  financial  world.  Therefore,  this  move- 
ment of  weak  banks  seeking  the  alliance  of  strong  ones  is  likely  to 
go  on. 

Congressman  Hill,  of  Connecticut,  in  a  speech  at  New  York 
last  week,  gave  an  item  from  his  own  experience.  "A  few  days 
ago,"  he  said,  "I  sold  some  stock  in  a  Kansas  bank  at  125,  which 
for  the  last  three  years  has  been  unsalable  at  par.     It  was  bought  by 


262    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

the  managers  of  a  Missouri  bank,  and  the  organization  will  here- 
after be,  to  all  intents  and  purposes,  a  branch  of  the  larger  institu- 
tion. The  necessities  of  the  community  were  greater  than  the 
limited  capital  of  the  little  bank  could  meet,  and  the  expense  of 
management  consumed  the  profits.  Now,  all  the  legitimate  wants 
of  that  vicinity  will  be  met  by  the  aid  of  the  larger  bank,  and  the 
increased  patronage  and  reduced  expenses  will  fully  justify  the 
price  paid  for  the  established  business  and  unused  good-will,  and 
all  parties  will  be  benefited." 

I  presume  that  branch  banking  in  this  shape  is  robbed  of  much 
of  its  terrors  to  the  small  bank.  The  next  thing  that  will  happen, 
probably,  in  the  case  mentioned  by  Congressman  Hill,  will  be  that 
the  little  bank  thus  cheerfully  converted  into  a  branch  will  establish 
an  office  in  some  smaller  place  which  now  has  no  banking  facilities 
at  all — an  agency  like  those  of  the  Scotch  banks,  where  it  would 
not  be  profitable  to  have  a  fully  equipped  branch,  but  where  some 
deposits  can  be  obtained  and  some  profit  made.  This  will  be  of 
benefit  to  the  community  and  to  the  banks. 

Are  these  affiliations  sufficiently  cohesive  to  be  classed  as  branch 
banking?  Undoubtedly  they  are  intended  to  be  so.  It  would  not 
be  worth  while  for  a  bank  seeking  a  branch  in  this  way  to  be  satis- 
fied with  less  than  a  majority  of  the  shares,  but  a  national  bank  is 
not  permitted  to  buy  the  shares  of  another  bank,  although  it  may 
lend  money  on  them.  We  must  suppose,  therefore,  that  the  amal- 
gamation which  is  now  taking  place  here  and  there  is  accomplished 
by  individuals  connected  with  the  large  bank,  who  buy  the  shares  of 
the  small  one,  and  borrow  from  the  former  the  money  which  pays 
for  them,  shares  being  pledged  as  collateral  security  for  the  loan. 
When  the  borrower  dies  the  loan  must  be  shifted,  and  this  shifting 
may  make  the  control  insecure,  but  there  is  no  doubt  that  means 
will  be  found  to  perpetuate  a  control  once  obtained.  The  main 
question  is  whether  the  union  of  the  two  turns  out  to  be  profitable. 
If  it  does,  it  will  be  permanent,  and  the  bank  whose  shares  have 
been  bought  in  this  way  will  continue  to  be  a  branch  of  the  other. 

That  such  union  will,  in  general,  result  in  profit  to  the  bankers 
concerned,  there  is  every  reason  to  anticipate.  Congressman  Hill, 
in  his  speech  to  which  I  have  just  referred,  presented  figures  show- 
ing the  percentage  of  the  cost  of  loans  in  banks  of  large  and  of 


BANKING  REFORM  AND  CURRENCY  SECTION  263 

small  capital,  respectively ;  that  is,  the  amount  of  expense  that  the 
banks  incur  on  each  dollar  they  invest  in  loans  and  discounts.  Of 
course,  the  percentage  of  cost  is  much  less  in  any  large  business 
than  in  a  small  one.  In  railroad  transportation,  for  example,  the 
percentage  of  expense  grows  less  and  less  as  the  volume  of  traffic 
grows  greater  and  greater,  until  the  full  capacity  of  the  road  is 
reached ;  and  the  same  rule  holds  good  in  banking.  But  nobody 
could  have  imagined  so  large  a  difference  in  expenses  as  Mr.  Hill 
found  to  exist  between  different  banks  in  this  country.  According 
to  reports  compiled  by  the  Comptroller's  office,  the  percentage  of 
expense  to  loans  in  ten  large  New  York  City  banks  was  1.68;  in  ten 
New  England  banks  of  $100,000  capital  each  it  was  3.94;  in  ten 
banks  of  $50,000  each  in  Iowa  and  Nebraska  it  was  5.33 ;  and  in  ten 
banks  of  $25,000  each  in  various  parts  of  the  country  it  was  7.00 
each.  The  wonder  is  that  these  banks  of  $25,000  capital  can  exist 
at  all,  when  it  costs  them  seven  dollars  on  each  hundred  that  they 
lend  for  one  year.  If  all  the  banking  business  in  the  United  States 
could  be  done  at  the  same  percentage  of  cost  as  the  ten  large  banks 
in  New  York  City,  Mr.  Hill  shows  that  the  annual  saving  to  be 
divided  between  the  banks  and  their  customers  would  be  upward  of 
$53,000,000  in  a  single  year.  Of  course,  no  such  economy  is  pos- 
sible under  any  conditions  of  banking  over  a  widely  extended  ter- 
ritory, but  it  is  certain  that  the  percentage  of  expense  could  be 
largely  reduced  if  branches  were  allowed.  In  fact,  it  is  this  saving 
of  expense  that  has  caused  the  great  extension  of  branch  banking 
in  Canada,  in  the  P.ritish  Islands,  and  on  the  continent  of  Europe. 

An  objection  urged  against  branch  banks  is  that  they  will  draw 
away  all  the  money  from  the  small  towns  and  use  it  in  large  cities. 
This  objection  is  not  in  harmony  with  the  one  which  says  that  the 
large  city  banks  will  send  so  much  money  into  the  small  towns 
through  the  branches  and  will  lend  at  such  low  rates  that  existing 
banks  cannot  make  a  living.  We  might  leave  these  two  classes  of 
objector-  to  neutralize  each  other,  but  my  opinion  is  that  the  flow 
of  capital  to  and  from  the  small  town  under  the  branch  system  will 
bear  pretty  close  rein) ion  to  the  demand,  flankers  use  their  money 
to  make  a  profit,  they  are  just  as  keen  to  make  a  profit  in  a  small 
town  as  in  a  large  city,  and  they  will  neglect  no  opportunity  in  one 
place  more  than  in  the  other.     The  object  of  having  a  branch  is  to 


264    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 


t 


make  money  at  the  branch.  Drawing  away  money  from  the  small 
town  when  there  is  a  local  use  for  it  would  soon  bring  the  branch 
to  an  end.  Its  depositors  would  leave  it,  and  presently  Mr.  Witham, 
or  somebody  else,  would  establish  a  branch  there  to  be  conducted 
on  more  rational  principles.  My  belief  is  that  more  money  would 
go  from  the  large  city  to  the  small  town  through  branches  than  goes 
now  in  the  shape  of  rediscounts  of  the  paper  of  independent  banks. 
I  think  so  because  the  city  bank  will  have  confidence  in  the  judg- 
ment of  its  own  agent  at  the  branch,  and  will  follow  his  advice,  and 
because  it  will  get  all  the  profit  on  the  loans  made  there,  instead  of 
dividing  it  with  the  independent  bank ;  and  also  because  it  will  desire 
to  extend  its  business  and  get  new  customers. 

A  third  objection  against  branch  banking  urged  with  some 
plausibility  at  the  present  time  is  that,  if  it  is  permitted,  all  the  banks 
will  be  consolidated  into  a  gigantic  trust,  so  that  nobody  can  get 
any  money  except  on  terms  dictated  by  a  few  powerful  magnates. 
In  reply  to  this  we  might  point  to  the  examples  of  other  countries 
where  branch  banking  has  full  swing.  In  Canada,  in  Great  Britain, 
in  France  and  Germany,  there  is  not  the  smallest  sign  of  a  "money 
trust,"  although  trusts  and  monopolies  in  other  trades  are  plentiful. 
On  the  contrary,  the  sharpest  rivalry  exists  in  the  competition  for 
deposits  and  for  loans  and  discounts,  and  the  rate  of  interest  there 
tends  downward  rather  than  upward.  This  happens,  too,  in  coun- 
tries where  note  issuing  is  a  monopoly  by  law.  It  is  a  monopoly  in 
Prance;  yet  that  is  the  country  which  has  the  lowest  interest  rate, 
and  in  which  the  rate  is  most  uniform  to  all  classes  of  borrowers  in 
both  city  and  country.  Note  issuing  is  almost  a  monopoly  in  Eng- 
land and  Germany,  yet  we  never  hear  of  anything  like  a  money  trust 
in  either  country.  The  truth  is  that  money  cannot  be  monopolized. 
The  money  in  the  banks  does  not  belong  to  them.  It  belongs  to  the 
depositors  for  the  most  part.  The  trust  companies,  the  savings 
banks,  and  the  private  bankers  would  no  doubt  be  glad  to  hear  of 
the  intention  of  the  regular  banks  to  discontinue  the  lending  of 
money,  or  to  put  up  the  rate  of  interest  on  loans.  They  would 
cheerfully  fill  the  vacuum.  So,  too,  would  the  agents  of  foreign 
banks.  Fortunately,  there  is  no  protective  tariff  against  money. 
We  admit  gold  free  of  duty.  We  allow  Canadian  banks  to  have 
branches  in  the  United  States,  as  many  as  they  like.     It  is  one  of 


BANKING  REFORM  AND  CURRENCY  SECTION  265 

the  queer  features  of  our  system  that  any  foreign  bank  can  have 
branches  here,  but  our  own  national  banks  cannot.  Another  curious 
fact  is  that  state  and  private  banks  may  have  branches  here,  while 
national  banks  may  not.  I  received  in  my  mail  a  few  days  ago  a 
circular  from  the  Colonial  Bank  of  New  York,  with  a  list  of  five 
branches.  The  greatest  oddity  of  all  is  that  if  this  Colonial  Bank, 
with  its  five  branches,  desired  to  enter  the  national  system,  it  could 
do  so  and  still  retain  its  branches,  for  the  law  expressly  authorizes 
that. 

Let  us  dismiss  the  thought  of  a  consolidation  of  banks  and  a 
money  trust  as  a  consequence  of  branch  banking.  Money  cannot 
be  monopolized.  Every  village  has  its  private  money  lenders  com- 
peting with  banks  in  "shaving  notes."  You  might  as  well  think  of 
monopolizing  the  water  of  the  Mississippi  River  by  building  a  dam 
at  St.  Louis,  as  to  monopolize  money  by  a  combination.  You  never 
could  get  an  agreement  of  bankers  to  attempt  it,  and  if  they  should 
do  so  the  combination  could  not  last  a  week. 

Another  argument  against  branch  banking,  a  sort  of  corollary 
of  the  one  preceding,  is  that  it  tends  to  subvert  free  institutions.  I 
have  read  with  attention  a  recent  speech  by  Mr.  McAshan,  of  the 
South  Texas  National  Bank,  on  this  subject.  He  gives  us  an  inter- 
esting discourse  on  governments,  ancient  and  modern,  monarchical, 
oligarchical,  and  democratic,  and  tells  us,  in  so  many  words,  that 
"branch  banking  and  asset  currency  is  one  move  in  the  general  direc- 
tion of  usurpation  of  privileges,  concentration  of  wealth,  monopoly 
of  money,  and  eventually  the  control  of  the  government  and  the 
pauperizing  of  the  people."  But  if  money  cannot  be  monopolized — 
and  I  have  already  shown  that  it  cannot — Mr.  McAshan's  fears  are 
groundless  and  our  liberties  are  not  threatened  in  that  way.  The 
money  power  may  be  a  present  and  growing  danger  in  this  country 
by  distorting  our  vision,  lowering  our  ideals,  and  setting  up  a 
golden  calf,  instead  of  Almighty  God,  as  the  object  of  daily  worship. 
but  the  money  power  is  not  the  same  thing  as  bank  power.  The 
money  power  resides  with  the  man  who  has  the  right  to  draw  checks 
on  the  bank,  not  with  the  one  who  pays  them. 

Branch  banking  and  asset  currency  arc  grouped  together  by  Mr. 
McAshan.  Although  there  is  no  necessary  connection  between 
them,  I  acknowledge  that  they  are  very  helpful  to  each  other.     They 


266  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

fit  together  very  nicely,  and  I  am  in  favor  of  both.  However  useful 
branch  banks  may  be  as  channels  for  the  distribution  of  capital, 
they  are  still  more  so  as  instruments  of  credit.  A  Scotch  bank  with 
one  hundred  branches  do?s  not  divide  its  capital  into  one  hundred 
parts.  It  lends  its  notes  at  the  branches  and  redeems  them  at  the 
head  office.  Local  redemption  is  dispensed  with,  and  is,  in  fact, 
quite  unnecessary.  Economy  of  capital,  of  time,  and  of  labor  are 
here  conjoined,  but  this  would  not  be  possible  without  practical 
freedom  of  note  issue.  A  Canadian  bank  may  receive  deposits  in 
Halifax  to-day,  and  lend  them  in  Winnipeg  to-morrow,  because  it 
can  issue  its  notes  promptly  at  the  latter  place.  If  it  were  obliged 
to  wait  till  it  could  transmit  the  money  from  Halifax  by  express, 
time  and  interest  would  be  lost.  If  it  could  not  issue  its  own  notes 
without  first  buying  bonds,  lodging  them  in  a  government  office, 
and  "taking  out"  currency,  the  entire  profit  of  the  loan  might  be 
dissipated. 

The  principal  defect  of  our  national  bank  system  is  the  rigidity 
of  its  note  circulation.  In  a  broad  sense,  the  volume  of  notes  is 
regulated,  not  by  the  wants  of  trade,  not  by  the  amount  or  kind  of 
commercial  paper  offered  for  discount,  but  by  the  market  price  of 
United  States  bonds.  Even  if  the  bonds  were  sufficient  in  amount 
and  satisfactory  in  price,  the  note  circulation  would  still  be  lacking 
in  the  elasticity  which  should  characterize  a  good  system.  By 
elasticity  is  meant  the  capacity  to  increase  or  diminish  in  volume  in 
accordance  with  the  needs  of  the  community,  and  simultaneously 
therewith. 

Note  issuing  is,  to  the  banker,  simply  a  question  of  profit.  When 
he  buys  bonds  and  deposits  them  in  the  treasury  as  security  for 
circulation,  he  virtually  buys  notes  from  the  government ;  and  his 
question  is  whether  he  can  get  more  profit  by  such  an  investment 
than  by  using  his  capital  in  other  ways.  His  gains  arise  only  from 
the  average  amount  of  his  notes  which  the  public  will  take  and  hold. 
There  will  always  be  some  notes  in  transit  to  Washington  for 
redemption  and  thence  back  to  the  bank ;  and  after  they  come  home 
they  will  remain  unused  for  a  while.  During  this  period  they  are 
unproductive  capital.  Therefore,  the  banker  will  take  from  the 
government  no  more  notes  than  he  thinks  he  can  keep  in  circulation. 
He  will  hold  none  for  emergencies. 


BANKING  REFORM  AND  CURRENCY  SECTION  267 

In  every  country  the  alternations  of  seed-time  and  harvest  have 
a  marked  influence  upon  the  currency  movement.  During  the 
spring  and  early  summer,  when  the  farmers  are  engaged  in  planting 
and  tilling  their  crops,  they  usually  incur  debt  to  the  country  mer- 
chants for  household  supplies;  and  the  currency  movement  is  then 
sluggish.  When  harvest  comes,  a  great  deal  of  work  must  be  done 
within  a  short  space  of  time,  and  this  requires  a  large  amount  of 
currency  to  pay  the  wages  of  laborers  and  to  meet  the  various  claims 
against  the  farmers  which  then  mature.  These  seasonal  demands 
are  imperative.  They  come  simultaneously  in  large  sections  of  the 
country.  Every  other  demand  for  currency  is  secondary  to  this, 
since  the  only  time  to  harvest  the  crops  is  when  they  are  ripe. 

The  annual  crop  movement  in  Canada  is  marked  by  an  expansion 
of  the  note  circulation,  while  no  such  thing  takes  place  in  the  United 
States.  What  occurs  among  us  is  a  movement  of  the  currency  itself 
from  one  part  of  the  country  to  another,  or  from  the  commercial 
centres  to  the  farming  districts,  and  a  reverse  movement  after  the 
bulk  of  the  autumnal  grain  and  cotton  is  sold  and  housed.  This 
money  has  to  be  carried  long  distances  and  guarded  at  considerable 
expense  and  with  loss  of  interest,  and  these  costs  fall  upon  the  agri- 
cultural community,  since  the  work  of  moving  must  be  compensated 
out  of  the  things  moved.  In  Canada  it  costs  nothing  to  keep  bank 
notes  in  the  bank's  vaults  from  one  crop-moving  season  to  the  next. 
Accordingly,  they  are  always  on  hand  at  the  places  where  they  are 
wanted. 

Our  national  bank  currency  not  only  fails  to  meet  the  varying 
demands  of  the  seasons,  but  fails  to  keep  pace  with  the  nation's 
growth  in  population  and  commerce.  The  volume  of  bank  notes 
reached  its  maximum,  $358,742,034,  in  1882.  Then  it  began  to 
shrink.  In  1892  it  had  fallen  to  $172,683,850,  or  about  one-half  the 
sum  outstanding  ten  years  earlier.  In  1893  a  rise  began  and  con- 
tinued till  T900,  when  it  was  accelerated  by  a  change  of  the  law, 
which  authorized  an  addition  of  10  per  cent,  to  the  currency  issuable 
on  the  security  bonds.  The  net  amount  was  thus  brought  up  to 
$323,863,597  oil  September  30,  1901,  which  is  $30,000,000  less,  how- 
ever, than  the  amount  in  circulation  twenty  years  ago.  Now  a 
fresh  decline  has  begun.  Banks  are  allowed  to  retire  their  circula- 
tion at  a  rate  not  exceeding  in  the  aggregate  $3,000,000  per  month. 


268    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

Nearly  $i  7,000 ,000  has  been  thus  retired  during  the  six  months 
ending  March  31,  1902. 

Within  a  comparatively  brief  period  the  bonded  debt  of  the 
United  States  will  in  all  probability  have  been  wholly  redeemed  and 
canceled.  It  is  not  likely  that  the  nation  will  continue  for  an 
indefinite  period  to  pay  interest  on  a  debt  of  which  it  might  easily  pay 
the  principal.  Such  a  policy  would  be  unjust  to  the  taxpayers,  and 
could  not  fail  to  meet  public  condemnation.  So  the  problem  is  not 
merely  how  to  make  note  issuing  under  the  present  system  a  little 
more  profitable,  but  how  to  keep  the  system  going  at  all.  It  cannot 
be  done,  except  by  using  other  securities  than  United  States  bonds. 
To  use  inferior  securities,  like  municipal,  or  railroad,  or  "industrial" 
bonds,  would  require  the  exercise  of  discrimination  on  the  part  of 
public  officers  in  the  selection  of  them,  and  would  thus  open  the 
door  to  political  influence  in  making  the  selection.  Moreover,  the 
best  judgment  of  the  most  impartial  Comptroller  of  the  Currency 
would  at  times  be  at  fault,  as  was  frequently  the  case  under  the 
state  systems  of  bond-secured  currency  before  the  civil  war.  How 
to  meet  the  approaching  crisis  is  the  chief  banking  problem  of  the 
present  day.  Any  plan  for  obtaining  a  real  credit  currency — a  cur- 
rency based  upon  the  assets  of  the  banks — must  have  regard  to  the 
traditions,  habits,  and  experience  of  the  American  people.  The 
smallest  change  consistent  with  the  end  to  be  achieved  will  be  the 
one  most  likely  to  succeed. 

Many  plans  for  securing  the  needed  change  in  our  system  have 
been  proposed.  The  best  of  these  is  the  one  presented  by  the 
Indianapolis  Monetary  Commission.  Under  this  plan  bank  notes 
are  to  be  a  first  lien  on  the  assets  of  the  issuing  bank,  including  the 
personal  liability  of  the  shareholders.  The  superior  claims  of  note- 
holders over  the  depositors  of  a  bank  rest  upon  the  fact  that  the 
societary  movement  cannot  go  on  without  a  currency,  and  that  the 
very  term  "currency"  implies  that  whatever  passes  from  hand  to 
hand  shall  be  accepted  without  hesitation  or  dispute.  This  cannot 
be  the  case  with  a  bank  note  if  there  is  any  doubt  about  its  goodness. 
Therefore,  the  first  step  to  be  taken  by  a  government  which  author- 
izes the  issuing  of  notes  to  circulate  as  money  is  to  provide  that  they 
shall  be  worth  what  they  purport  to  be.  The  government  has  so 
provided  in  the  existing  law  by  requiring  that  a  sufficient  portion  of 


BANKING  REFORM  AND  CURRENCY  SECTION  269 

the  assets  of  each  note-issuing  bank  shall  first  be  set  aside  and  held 
in  the  Treasury  for  the  redemption  of  its  notes.  If  the  preference 
given  to  noteholders  in  the  Indianapolis  plan  is  regarded  as  an 
injustice  to  depositors,  the  same  injustice  exists  under  the  terms  of 
the  present  law. 

The  goodness  of  the  currency  is  still  further  secured  in  the 
Indianapolis  plan  by  a  bank-note  guaranty  fund  equal  to  5  per  cent. 
of  all  the  outstanding  circulation,  to  be  held  in  the  treasury  for  the 
redemption  of  the  notes  of  failed  banks.  A  guaranty  fund  of  5 
per  cent,  on  the  present  circulation  of  national  banks  would  be 
upwards  of  $15,000,000.  The  total  circulation  of  banks  that  have 
failed  during  the  forty  years  that  the  system  has  been  in  force  has 
been  only  $23,559,915.  The  assets  of  these  banks,  including  the 
contributions  of  shareholders,  have  yielded  this  sum,  minus  $1,352,- 
612.  A  guaranty  fund  of  one-half  of  1  per  cent,  would  have 
covered  this  loss. 

If  the  fund  is  at  any  time  reduced  below  5  per  cent,  of  all  out- 
standing circulation,  the  Comptroller  of  the  Currency  is  to  make  an 
assessment  on  the  banks,  in  proportion  to  their  notes,  to  replenish  it. 
The  plan  contemplates  the  substitution  of  the  guaranty  fund  in  place 
of  the  existing  bond  security,  by  the  gradual  withdrawal  of  the 
latter,  so  that  at  the  end  of  ten  years  from  the  passage  of  the  act  no 
bond  deposit  shall  be  required.  The  existing  provision  of  law,  by 
which  all  national  banks  are  compelled  to  receive  the  notes  of  other 
banks  at  par  in  the  payment  of  debts  to  themselves,  is  to  remain  in 
force ;  also  the  provision  by  which  the  government  is  required  to 
receive  bank  notes  at  par  for  all  public  dues  except  duties  on  imports. 
The  proposed  bill  repeals  that  portion  of  the  present  law  which  pro- 
vides that  national  bank  notes  shall  be  received  at  par  for  all  debts 
owing  by  the  United  States.  Therefore,  every  holder  of  a  failed 
bank  note  can  pay  it  to  the  government  at  par,  and  the  government 
cannot  pay  it  to  anybody  without  the  consent  of  the  payee.  The 
significance  of  this  part  of  the  Indianapolis  plan  evidently  did  not 
impress  the  framcrs  of  it,  since  their  bill  disclaims  government 
responsibility  for  the  notes  beyond  the  proper  application  of  the 
funds  and  due  enforcement  of  the  remedies  provided;  but  since  the 
government  itself  will  in  practice  be  the  last  holder  of  every  note 
which  falls  below  par,  such  disclaimer  is  meaningless. 


270  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

No  person  or  corporation  could  lose  anything  by  such  notes,  nor 
could  the  government  itself  lose  by  them.  Ordinarily  it  would  pass 
the  bank  notes  received  in  the  course  of  business  on  to  the  Redemp- 
tion Bureau  at  Washington,  and  there  obtain  legal  tender  money  for 
them.  Any  failed  bank  notes  received  would  be  passed  into  the 
guaranty  fund,  where  legal  tender  money  would  be  obtained  for 
them.  In  case  of  a  deficiency  in  the  latter  fund,  the  power  of 
requiring  fresh  contributions  would  remain ;  but  the  experience  of 
the  past  assures  us  that  no  such  deficiency  would  occur. 

Objections  to  the  Indianapolis  plan  based  upon  supposed  danger 
of  loss  to  noteholders  are  groundless.  Even  if  the  rascals  should 
take  advantage  of  the  law  to  start  sham  banks,  in  order  to  put  out 
notes  and  then  abscond  with  the  proceeds,  the  means  which  the 
government  would  have  for  self-protection  would  be  indefinitely 
greater  than  any  governmental  powers  in  existence  during  the 
Suffolk  Bank  period  in  New  England.  And  yet  the  total  losses  to 
noteholders  under  that  go-as-you-please  system  were  only  $877,004 
in  twenty  years,  and  would  have  been  covered  by  a  tax  of  one- 
eighth  of  1  per  cent,  per  annum  on  the  average  circulation  out- 
standing. Anybody  who  objects  to  the  Indianapolis  plan  is  bound 
to  offer  a  better  one,  since  the  present  bond-secured  system  of  note 
issues  is  doomed. 

The  advantages  of  branch  banking  are  briefly  these : 

I.  Other  things  being  equal,  two  banks  joined  together  are 
stronger  than  one,  and  three  are  stronger  than  two.  Branch  bank- 
ing is  not  a  guarantee  against  bad  banking  and  internal  rot,  but  it  is  a 
protection  against  accidents  and  external  calamities.  It  is  another 
illustration  of  the  familiar  proverb,  "In  union  there  is  strength." 

II.  For  this  reason  the  public  have  greater  confidence  in  a  union 
of  banks  than  in  the  same  number  of  banks  taken  separately.  Branch 
banking  would,  therefore,  improve  the  credit  of  the  banks  so  allied, 
and  increase  their  deposits.  This  advantage  would  accrue  more 
particularly  to  the  branch  bank,  or  the  small  country  bank  taken  into 
the  system,  than  to  the  parent  bank  in  the  city. 

III.  Branch  banking  would  reduce  the  total  expense  of  banks, 
and  this  saving  would,  in  the  long  run,  be  shared  with  the  bank's 
customers  in  the  form  of  lower  rates  of  interest. 

IV.  Branch  banking  would  tend  here,  as  in  other  countries,  to  , 


BANKING  REFORM  AND  CURRENCY  SECTION  271 

uniform   rates  of   interest  between   cities   and  the   rural   districts. 

V.  Branch  banking  has  the  advantage  that  it  can  be  extended 
to  places  too  small  to  support  a  regular  bank,  which  requires  a  full 
complement  of  officers  and  a  reserve  of  coin  or  greenbacks.  Offices, 
or  agencies,  can  be  established  at  places  which  are  now  wholly 
destitute  of  bank  facilities,  but  where  some  deposits  could  be 
obtained  and  some  safe  and  profitable  business  done,  if  the  public 
were  assured  that  the  parent  bank  was  a  strong  institution. 

VI.  Branch  banking  affords  facilities  for  communicating 
knowledge  of  the  relative  needs  of  business  in  different  places  and 
for  responding  to  them.  Knowledge  of  the  demand  and  supply  of 
money  would  be  quickly  conveyed  from  the  branch  at  the  small 
town  to  the  parent  bank  in  the  city,  and  funds  could  be  quickly  trans- 
ferred to  the  branch,  either  from  the  parent  bank  or  from  any  other 
branch  where  the  demand  was  less  pressing  and  vice  versa. 

Remarks  by  Henry   IV.  Yates: — 

The  subject  of  branch  banks,  upon  which  I  have  been  requested 
to  give  my  views  at  this  gathering  of  bankers,  is,  I  think,  of  much 
greater  importance  than  is  generally  realized.  I  must  admit,  how- 
ever, that  I  have  been  somewhat  disturbed  from  the  outset  at  the 
position  I  shall  be  compelled  to  occupy  in  discussing  it.  Many  of 
the  most  eminent  bankers  and  financiers  have  declared  themselves 
in  no  uncertain  terms  as  being  in  favor  of  the  adoption  by  the 
United  States  of  this  system  of  banking.  Some  of  those  so  grouped 
are  men  for  whom  all  bankers  entertain  the  highest  respect,  and 
whose  opinions  upon  financial  subjects  most  of  us  have  been  willing 
to  accept  as  correct.  To  go  adverse  to  them  now  requires  no  small 
amount  of  courage,  if,  indeed,  it  may  not  be  called  presumption. 
My  convictions,  however,  upon  this  subject  are  so  strong  and 
decided  that  I  shall  not  hesitate  to  show  to  the  best  of  my  ability 
wherein  I  believe  these  men  are  wrong,  and  that  if  they  succeed  in 
accomplishing  what  they  propose  it  would  be  disastrous  to  our 
existing  banking  system  and  against  the  best  interest  of  the  public. 

We  cannot  as  bankers  be  blind  to  the  events  which  are  occurring 
in  the  commercial  and  industrial  world — events  which  seem  to 
change  entirely  the  manner  in  which  these  affairs  have  heretofore 
been  conducted.     We  cannot  expect  that  our  business  will  remain 


272     PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

unmolested  when  there  is  a  whirl  of  change  going  on  all  around  us. 
The  most  conservative  among  us,  recognize  the  situation,  and  old 
and  young  alike  are  prepared  to  receive  new  ideas  and  to  take  in 
all  the  improvements  upon  the  old  ways  of  doing  business,  so  that 
we  may  be  fitted  to  work  out  our  part  in  the  great  transformations. 
We  are  all  conscious  of  the  weakness  which  prevails  in  our  banking 
system  and  we  are  desirous  of  having  it  removed  and  the  system 
strengthened  and  improved  in  any  manner  that  good  judgment  and 
wise  experience  will  dictate.  But  it  does  not  follow  from  this  that 
we  should  conclude  that  our  banking  system  is  so  utterly  bad,  that 
the  only  remedy  for  the  situation  is  its  entire  extinguishment  and 
the  creation  in  its  place  of  another  system.  This  is  what  I  believe 
would  result  from  the  passage  of  a  law  which  would  establish 
among  us  the  monarchical  British  and  continental  systems  of  large 
central  banks  with  numerous  branches. 

The  bank  of  Kansas  City,  for  instance,  might  very  properly  be 
permitted  to  maintain  branches  at  its  stockyards  town,  and  the 
same  would  be  true  at  St.  Joseph  and  Omaha.  The  plan  might  be 
expanded  so  as  to  permit  country  banks  to  maintain  branches  in 
towns  and  hamlets  within  the  limits  of  the  same  county.  Such  in 
arrangement  as  this  would  be  fair  between  banks  and  beneficial  to 
the  public. 

There  are,  however,  no  limitations  of  this  character  in  the  bill 
which  was  recently  reported  and  recommended  for  passage  from 
the  banking  and  currency  committee  of  the  House  of  Representa- 
tives. This  act  authorizes  the  establishment  of  branches  anywhere 
in  the  United  States,  its  colonies,  or  in  foreign  countries. 

Mr.  Fowler,  the  chairman  of  the  committee,  announced  a  few 
days  ago  that  over  1,000,000  copies  of  the  bill,  together  with  a  cir- 
cular advertising  its  merits,  have  been  distributed  throughout  the 
country  wherever  they  would  do  the  most  good.  A  campaign  of 
education  in  its  favor  has  been  inaugurated,  which  is  to  be  prose- 
cuted at  the  expense  of  the  general  government,  and  no  means  will 
be  spared  by  the  powerful  combination  working  for  it  to  accomplish 
the  passage  of  the  act. 

Under  this  law  any  large  eastern  bank  can  establish  a  branch, 
for  instance,  here  in  Kansas  City,  and  take  from  the  men  who  are 
engaged  in  the  business  the  results  of  years  of  toil  and  devotion.     It 


BANKING  REFORM  AND  CURRENCY  SECTION  273 

does  not  help  the  case  to  say  that  the  Kansas  City  banks  may  in  a 
like  manner  prey  upon  their  smaller  neighbors  in  the  surrounding 
towns  and  villages. 

In  opposition  to  the  statement  that  the  branch  system  would 
destroy  the  existing  system  of  independent  banks,  the  committee 
publishes  a  letter  from  Mr.  E.  S.  Clouston,  general  manager  of  the 
Bank  of  Montreal  and  president  of  the  Canadian  Bankers'  Associa- 
tion, in  which  he  says  that  the  statement  is  fallacious  and  that  there 
are  many  Canadian  instances  which  prove  the  contrary.  Upon  this 
most  important  phase  of  the  question  the  committee  itself  has  noth- 
ing to  say  except  to  brand  the  statements  as  being  "superficial  stock 
statements  usually  put  forward  by  those  who  are  utterly  unfamiliar 
with  this  subject,"  and  closing  with,  "We  submit  that  traditional 
prejudice  and  selfishness  shall  give  way  to  reason,  experience,  and 
common  interest  of  the  whole  people." 

Calling  names  is  not  argument  under  any  circumstances.  Those 
who  differ  from  the  committee's  conclusions  may  be  just  as  unpre- 
judiced and  unselfish  and  have  just  as  great  a  regard  for  the  public 
interest  as  those  who  support  them.  It  is  not  my  purpose  to  con- 
sider the  conditions  prevailing  in  Canada,  which  Mr.  Clouston 
asserts  make  it  possible  for  the  two  systems  to  exist  alongside  of 
each  other.  I  do  not  know  anything  about  Canada,  although  judg- 
ing from  the  noise  which  has  been  made  concerning  the  superior 
merits  of  the  Canadian  system,  it  comes  somewhat  as  a  surprise  to 
be  told  that  any  other  kind  of  banking  is  tolerated  here.  They 
doubtless  know  in  Canada  what  is  best  for  them — what  we  want  to 
know  is,  what  is  best  for  the  United  States? 

Against  Mr.  Clouston's  statement,  who  admits  that  he  speaks 
from  the  standpoint  of  a  Canadian  banker  and  does  not  know 
whether  the  branch-bank  system  would  be  successful  in  the  United 
States  or  not,  although  he  says  "he  should  dearly  like  to  make  the 
attempt,"  we  have  the  statements  of  prominent  American  writers 
and  thinkers  upon  the  subject  who  concur  in  the  belief  that  the 
branch  system  proposed  in  the  Fowler  bill  would  result  in  the 
elimination  of  the  existing  system  of  independent  banks.  This 
concurrence  may  be  fairly  inferred  from  the  utterances  of  some  of 
the  advocates  of  the  branch  system. 

For   instance,   Hon.   James   H.    Eckels    is   one  of   its    strongest 
18 


274  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

advocates.  He  recommended  branch  banks  in  his  Comptroller's 
report  of  1896,  but  in  his  plan  they  were  restricted  to  cities,  towns, 
and  villages  where  a  national  bank  did  not  exist.  This,  of  course, 
rendered  them  harmless. 

Professor  Charles  F.  Dunbar,  in  a  paper  upon  the  national  bank- 
ing system,  reprinted  for  use  in  Harvard  University,  also  endorsed 
the  system,  but  he  would  restrict  branches  to  state  limits. 

Professor  J.  Laurence  Laughlin,  in  his  report  of  the  Indian- 
apolis Monetary  Commission,  also  favored  branch  banks.  He  was 
decided  upon  the  question  of  monopoly,  but  declared  this  would  be 
no  valid  objection  to  them — that,  to  use  his  own  words,  "Even  if 
independent  banks  must  disappear  in  the  face  of  the  new  system, 
this  could  only  come  about  through  the  elimination  of  the  institu- 
tions less  fit  to  perform  given  services  for  the  community  at  least 
cost  to  it."  Professor  Laughlin  welcomes  the  monopoly  and 
believes  in  it.  The  conclusions  of  writers  like  Professor  Laughlin 
are  based  solely  upon  theoretical  grounds.  They  discuss  the  ques- 
tion from  that  standpoint  alone,  and  give  no  consideration  to  any 
practical  difficulties  connected  with  it,  for  the  reason,  perhaps,  that 
having  had  no  experience  in  the  business,  they  do  not  discern  the 
difficulties. 

Practical  bankers,  however,  must  instinctively  realize,  when  their 
attention  is  directed  to  the  subject,  that  if  this  amendment  becomes 
a  law,  the  independent  banks  must  go — not  for  the  reason  suggested 
by  Professor  Laughlin,  that  they  would  be  the  least  fit  to  live,  but 
because  they  would  be  legislated  out  of  existence.  The  advantages 
which  the  branch  banks  would  possess  under  the  law  would  be 
sufficient  to  guarantee  their  success  in  competition  with  the  existing 
system  of  banks.     I  will  name  some  of  these  advantages: 

Every  bank  under  the  existing  system  must  be  provided  with 
some  capital.  It  is  demanded  by  law  and  also  by  necessity  in  order 
that  it  may  supply  a  guaranty  in  attracting  deposits.  A  bank  with- 
out capital  would  be  shunned  by  depositors  and  would  soon  be 
forced  out  of  business.  The  branch  banks,  on  the  contrary,  would 
have  no  capital  and  would  need  none.  They  would  be  able  to 
obtain  credit  and  transact  business  upon  the  capital  and  the  credit 
of  the  parent  bank,  the  capital  of  which  would  naturally  be  much 
larger  than  that  of  a  local  bank. 


BANKING  REFORM  AND  CURRENCY  SECTION  275 

The  capital  of  the  independent  bank  is  taxed  like  other  property. 
It  must  stand  its  fair  share  of  the  public  burdens.  The  branch  banks 
would  pay  no  taxes.  Under  the  national  currency  act,  the  shares 
of  bank  stock  can  be  taxed  only  at  the  place  where  the  bank  is 
located,  which  would  be  the  domicile  of  the  parent  bank,  and  the 
branch  having  no  capital,  there  would  be  nothing  to  tax. 

These  two  features  alone — freedom  from  capital  and  from  tax- 
ation— would  seem  to  settle  the  question  against  the  independent 
banks  and  make  it  unnecessary  to  refer  in  detail  to  other  advantages 
which  the  branch  banks  would  possess  among  which  are  the  better 
facilities  for  obtaining  collections,  for  loaning  money,  and  freedom 
from  the  requirement  to  maintain  a  fixed  reserve  against  deposits. 

But  it  may  be  thought  by  some  one  that  granting  the  fact  that 
the  independent  banks  would  not  be  able  to  compete  with  the  branch 
banks,  yet  the  system  would  be  free  and  the  independent  banks  could 
secure  advantages  by  organizing  under  the  act.  A  very  slight  con- 
sideration will  show  that  this  would  be  practicable  in  comparatively 
few  cases. 

The  habits,  tastes,  temperament,  and  education  of  the  independ- 
ent bankers  would  unfit  them  to  become  the  mere  employees  of  a 
board  of  directors  perhaps  a  thousand  miles  away.  The  managers 
of  these  branches,  as  stated  by  Mr.  Clouston  to  be  the  case  in 
Canada,  are  usually  men  trained  from  boyhood  in  the  service  of  the 
banks.  Our  bankers  as  a  rule  do  not  possess  these  clerical  attain- 
ments. They  are  generally  men  who  have  acquired  some  capital  to 
start  with  in  some  other  line  of  business.  They  may  have  been 
merchants  or  cattle  dealers  or  what  not,  and  the  experience  gained 
in  this  manner  has  been  of  far  more  practical  value  to  their  banks 
than  would  have  been  the  possession  of  any  amount  of  clerical 
ability.  They  have  proved  to  be  excellent  drivers  for  the  simple 
machines  they  have  been  running,  but  they  would  make  indifferent 
cogs  in  the  complex  mechanism  of  the  branch-bank  system. 

Others  may  believe  that  even  if  the  branch-bank  bill  becomes  a 
law,  it  will  be  impossible  to  put  the  system  into  operation  to  the 
extent  suggested.  It  may  be  pointed  out  that  no  disposition  has 
been  shown  by  large  banks  in  the  past  to  establish  branches — that 
the  difficulty  which  exists  for  obtaining  proper  local  management 
would  defeat  the  purpose.     Without  doubt,  this  difficulty  is  a  serious 


276    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

one  and  has  had  its  influence  in  preventing  extensions  heretofore, 
but  the  experience  of  the  past  in  this  respect  cannot  be  considered  in 
this  connection.  Both  our  national  and  state  laws  have  practically 
prohibited  branch  banks.  If  anything  of  the  kind  was  attempted, 
it  could  only  be  done  by  organizing  separate  banks  under  the  ordi- 
nary forms  and  requirements  of  the  banking  laws  prevailing.  I  do 
not  think  that  many  of  the  old  and  successful  banks  in  the  eastern 
cities  would  indulge  in  branches,  no  matter  what  the  inducements 
offered  might  be.  But  if  these  banks  are  authorized  in  the  manner 
proposed,  concentrated  capital  will  see  to  it  that  the  plan  will  not  be 
a  failure.  If  existing  banks  refuse  to  take  advantage  of  the  priv- 
ilege, other  banks  will  be  organized  especially  for  the  purpose. 

I  have  endeavored  so  far  to  make  clear  the  following  points : 
The  branch-bank  system  if  adopted  as  proposed  will  destroy  our 
existing  system  of  independent  banks.  Our  existing  banks  will  not 
be  merged  into  the  new  system.  If  the  bill  becomes  a  law,  the  system 
proposed  will  go  into  operation.  It  now  remains  for  us  to  consider 
the  theory  upon  which  the  plan  is  based  and  the  benefits  to  be 
derived  from  it,  which  in  the  opinion  of  its  advocates  will  justify  the 
radical  action  proposed. 

There  are  two  words  which  we  hear  frequently  nowadays  when 
our  financial  problems  are  discussed:  "elasticity" — for  circulation, 
and  "fluidity" — for  capital.  This  "fluidity"  for  capital  is  to  be 
realized  by  means  of  the  branch-bank  system.  Money,  it  is  thought, 
will  flow  naturally  and  automatically,  without  friction  and  at  a 
minimum  of  cost,  from  one  section  of  the  country  to  another,  and 
the  power  of  the  whole  system  may  be  concentrated  whenever  the 
occasion  calls  for  it.  It  is  a  plausible  and  attractive  theory.  Atten- 
tion is  always  directed  at  the  beginning  of  the  argument  to  the 
practice  and  experience  in  other  countries  where  the  branch  system 
has  prevailed  with  success. 

This  kind  of  argument  has  its  merits,  but  is  it  a  good  one  in  this 
case?  We  might  with  equal  force  declare  that  because  nearly  all 
the  great  governments  in  the  world  are  monarchies,  therefore 
monarchies  are  superior  to  republics.  The  business  methods  pre- 
vailing in  these  countries  and  the  circumstances  attending  them  are 
entirely  different  from  those  which  prevail  with  us.  It  has  not  been 
our  custom  to  look  to  these  countries  for  examples  to  guide  us  in 


BANKING  REFORM  AND  CURRENCY  SECTION  277 

our  mercantile  and  industrial  methods — why,  then,  should  we  attach 
so  much  importance  to  their  financial  methods? 

The  main  advantages  asserted  for  the  system  are  as  follows : 
The  security  of  a  strong  banking  credit  which  will  prevent  and  con- 
trol panics.  The  extension  of  banking  facilities  into  localities  unable 
to  supply  the  capital  required  for  banks.  The  lowering  and  equaliz- 
ing of  the  interest  rate. 

All  of  these  things  are  of  great  importance,  but  there  are  other 
things  in  this  connection  of  equal  or  greater  importance  to  be  con- 
sidered. If  in  order  to  secure  certain  advantages  these  other  things 
are  threatened  or  endangered,  it  would  be  well  to  halt  before  the 
step  is  taken. 

The  banking  business  is  not  a  theory,  but  a  fact,  and  it  per- 
tains especially  to  communities  taken  separately.  It  is — what  Gen- 
eral Hancock  said  of  the  tariff — a  local  question.  The  business  is 
also  a  species  of  trusteeship.  It  has  been  said  that  he  is  a  public 
benefactor  who  causes  a  blade  of  grass  to  grow  where  none  grew 
before.  So  is  the  banker,  who  releases  the  buried  talents,  repre- 
sented by  bank  deposits,  and  joins  with  them  other  talents  of  equal 
power  and  value.  But  the  master  of  the  talents  is  the  community 
in  which  the  banker  operates.  The  gains  and  the  profits  must  not 
be  sequestered  or  taken  away,  but  diffused  in  various  ways  through 
the  community.  If  taken  away  to  swell  the  perhaps  inordinate 
gains  of  some  other  community,  then  so  far  as  the  master  commun- 
ity is  concerned,  the  talents  may  just  as  well  have  remained  buried. 

This,  then,  is  my  strongest  plea :  branch  banks,  instead  of  being 
elements  of  strength  for  the  communities  in  which  they  would  be 
established,  would  be  elements  of  weakness — of  wasted  efforts  and 
lost  opportunities.  They  would  bring  nothing  into  the  community 
and  would  take  much  out  of  it.  But  let  us  investigate  the  special 
claims  advanced  for  them. 

Is  it  certain  that  they  would  prevent  panics  or  control  them  ? 
No  panic  has  ever  been  occasioned  by  the  failure  of  country  banks 
or  from  any  cause  which  had  their  origin  in  the  country.  It  has 
always  been  the  failure  of  city  banks  which  has  brought  on  the 
trouble,  and  there  is  nothing  in  this  proposed  law  which  will  make 
the  city  hanks  any  stronger  than  they  are  now;  on  the  contrary, 
there  is  much  to  weaken  them.     Instead  of  the  independent  units 


278    .PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

which  now  distinguish  our  banking  system  and  which  to  a  remark- 
able degree  have  borne  the  brunt  of  the  tempest  and  survived  the 
storm,  when  city  banks  have  gone  down  by  the  wholesale,  we  shall 
have  central  institutions  with  their  numerous  connected  branches 
all  going  down  together,  just  as  rows  of  bricks  will  tumble  when 
you  overturn  one  at  the  head  of  the  line. 

Many  different  views  prevail  concerning  the  cause  of  panics. 
There  are  people  who  believe  that  they  travel  in  cycles,  and  that 
there  is  some  mysterious  connection  between  the  numbers  of  the 
years  intervening  between  them.  But  if  this  were  true,  we  should 
expect  the  rule  to  be  universal,  whereas  as  a  fact  this  is  not  the  case, 
because  they  occur  with  greater  frequency  in  the  United  States  than 
in  other  countries.  One  feature  pertaining  to  them  is  simple  enough 
and  will  be  conceded  by  all,  and  that  is  the  manner  of  their  ocular 
demonstration,  which  is  a  struggle  to  obtain  all  the  money  in  sight, 
it  being  well  known  that  there  is  not  enough  to  go  around.  Panics 
are  generally  preceded  by  large  withdrawals  of  money  from  cir- 
culation, the  movement  having  been  induced  from  some  plainly  dis- 
cerned action  or  trade  movement.  In  the  United  States  we  have 
had  more  of  these  operating  causes  for  currency  contraction  and 
therefore  we  have  had  more  panics. 

For  instance,  the  panic  of  1873  was  preceded  by  the  contraction 
incident  to  the  funding  of  the  war  debt,  and  the  panic  of  1893  was 
preceded  by  the  heavy  exportation  of  gold,  demanded  in  payment  for 
the  unusual  amount  of  American  securities  which  for  some  reason 
was  thrown  back  upon  our  hands.  What  the  reason  was  for  the 
return  of  these  securities  is  also  no  mystery. 

Mr.   Stickney  in  his   Milwaukee  address1    declared  with  great 

emphasis  that  the  fact  that  the  panic  of  1893  was  experienced  only 

in  the  United  States  proves  his  contention  as  to  the  superiority  of 

the   foreign   system   of  banking,   which   prevented  the  panic   from 

extending  to  those  countries,  and  he  asserts  that  if  we  had  had  this 

system  in  the  United  States  the  panic  would  have  been  prevented 

here.     But  Mr.  Stickney  failed  to  note  another  fact  which  should 

be  considered  in  this  connection.     That  only  in  the  United  States 

had  a  political  warfare  with  large  possibilities  of  success  been  waged 

against  the  standard  of  value  which  had  previously  prevailed  and 

1  See  the  address  by  A.  B.  Stickney  entitled,  "The  Medium  of  Exchange 
and  the  Banking  Function,"  on  page  205. 


BANKING  REFORM  AND  CURRENCY  SECTION  279 

in  whose  terms  all  contracts  for  the  payment  of  money  had  been 
made ;  that  only  in  the  United  States  was  the  business  of  the  coun- 
try paralyzed  by  the  threat  of  such  a  far-reaching  financial  revolu- 
tion. It  was  not  strange  that  the  holders  of  these  money  contracts 
should  throw  them  upon  the  market  at  this  particular  period  when 
the  controversy  and  its  puerile  compromises  had  produced  their  log- 
ical effects. 

It  is  only  reasonable  to  believe  that  the  like  circumstances  in 
other  countries  would  have  produced  like  results,  branch  banks  or 
no  branch  banks.  We  have  had  more  panics  in  the  United  States 
mainly  because  we  have  had  more  political  interference  with  busi- 
ness and  financial  matters,  and  they  probably  could  not  have  been 
prevented  by  any  system  of  banks. 

The  wider  extension  of  banking  facilities  would  be  desirable. 
The  enjoyment  of  them  by  communities  which  do  not  possess  the 
capital  required  for  a  bank  would  undoubtedly  prove  of  advantage 
to  such  communities,  but  this  feature  of  itself  is  not  of  sufficient 
importance  to  justify  the  sweeping  measure  proposed.  It  may  also 
be  asked  if  these  facilities  could  not  be  as  well  supplied  by  branches 
of  banks  in  the  same   country  or  state. 

It  is  probable  that  the  interest  rate  would  be  more  generally 
equalized.  The  loaning  business  being  reduced  to  a  system  and 
the  same  rules  applied  everywhere  for  the  grading  of  credits  and 
valuing  of  securities,  would  naturally  work  to  this  end.  It  is  pos- 
sible that  the  prevailing  rate  of  interest  might  be  lowered,  especially 
if  banks  are  also  to  be  permitted  to  issue  unsecured  bank  notes — but 
this  is  by  no  means  certain.  The  interest  rates  which  have  pre- 
vailed for  a  number  of  years  past  in  the  United  States  have  been 
very  low,  and  it  is  doubtful  if  they  could  be  forced  any  lower.  It 
would  be  much  safer  to  prophesy  that  they  would  go  higher.  There 
would  be  a  less  number  of  competing  banks,  and  their  thorough 
organization  would  easily  permit  of  combinations  to  maintain  rates. 

Having  considered  what  I  conclude  to  be  the  strongest  points 
advanced  in  favor  of  the  branch  system,  I  will  now  endeavor  to  show 
some  of  the  merits  of  our  existing  system  in  comparison  with  them. 

Mr.  Stickncy  declared  that  this  is  no  system  at  all,  and  others 
maintain  that  it  is  so  weak  and  decrepit  that  it  cannot  be  mentioned 
in  comparison,  for  instance,  with  the  Canadian  system,  and  that  it  is 


\,   .practical  rrorlems  tn  ranking  and  currency 

at  a  disadvantage  when  compared  with  the  banking  system  of  some 
little  South  American  state,  whose  people  know  nothing  of  gold 
and  silver  as  money,  but  possess  the  inestimable  advantages  supplied 
by  a  central  bank  and  its  branches.  We  will  admit  that  our  Amer- 
ican banking  system  is  a  peculiar  one,  but  it  can  at  the  same  time  be 
fairly  claimed  for  it,  that  it  is  exactly  adapted  to  American  ideas 
and  American  manners,  and  that  it  has  accomplished  for  American 
commerce  and  American  industry  what  no  other  system  could  ever 
have  supplied  for  them,  or  has  ever  supplied  to  any  other  country 
in  the  world.  This  system  has  been  a  process  of  natural  growth, 
not  a  creation  of  law.  The  circumstances  demanded  banks  and  the 
banks  came  in  response  to  that  demand.  Let  us  glance  briefly  at 
its  history : 

The  downfall  of  the  "wildcat"  banks  and  some  that  were  not 
"wildcat"  in  the  panic  of  1857  left  a  disorganized  condition  for  the 
banking  business.  The  day  of  specially  chartered  banks  had  come 
to  its  close,  and  in  most  of  the  states  banks  could  be  incorporated 
only  under  a  general  statute  applicable  to  all  corporations.  Many 
years  passed  before  there  was  any  state  supervision  provided  for 
them.  The  National  Bank  Act  of  1862  supplied  the  need  for  banks 
in  the  older  and  wealthier  sections  of  the  country,  but  the  minimum 
of  capital  demanded  was  too  large  for  small  communities  and 
especially  for  the  rapidly  growing  states  of  the  West.  State  organ- 
izations were  the  only  means  presented  for  satisfying  this  need. 

As  an  illustration  of  what  has  occurred  in  the  lifetime  of  a  man 
who  may  not  yet  be  called  old,  let  me  instance  the  commencement 
and  growth  of  banking  in  Nebraska.  In  1863  I  joined  in  the  organ- 
ization of  what  was  probably  the  first  national  bank  west  of  the 
Missouri  river,  and  which  at  the  time  was  the  only  incorporated 
bank  in  the  limits  of  the  present  State  of  Nebraska.  At  that  time 
there  were  within  those  limits  only  seven  banking  institutions — two 
of  which  were  in  Omaha  and  three  in  Nebraska  City.  Their  com- 
bined resources  would  not  have  aggregated  a  quarter  of  a  million 
dollars.  Nineteen  years  afterwards  the  number  of  national  banks 
had  only  increased  to  ten,  but  there  were  83  state  banks.  The  fol- 
lowing nineteen  years  were  years  of  marvelous  development,  and  in 
1901  there  were  116  national  and  421  state  banks,  making  a  total 
of  537  banks,  with  aggregate  resources  of  113.9  millions  of  dollars. 


BANKING  REFORM  AND  CURRENCY  SECTION  281 

The  ratio  of  growth  in  Kansas  was  very  similar  to  that  of 
Nebraska.  In  1880  there  were  only  12  national  banks,  but  there 
were  148  state  banks;  and  in  1901  the  number  of  nationals  had 
increased  to  119  and  state  banks  to  410,  making  529  banks  with 
aggregate  resources  of  106  millions  of  dollars. 

These  figures  tell  the  story  of  banking  in  all  of  our  western 
states,  and  under  no  branch  system  would  such  growth  have  been 
possible.  The  history  has  been  a  continuing  one  and  is  so  to-day. 
As  the  earlier  settled  portions  of  our  great  domain  have  grown  in 
wealth  and  population  and  put  away  the  crude  conditions  of  the 
pioneer  life,  national  banks  have  taken  the  place  of  the  early  state 
banks.  But  the  pioneer  conditions  have  been  reproduced  elsewhere 
— have  moved  on  as  westward  the  star  of  empire  has  taken  its  way. 
The  covered  wagon  of  the  emigrant  has  carried  with  it  the  embry- 
onic banker,  and  along  with  the  first  store,  the  first  blacksmith  shop, 
the  first  hotel  and  livery  stable  has  been  the  shanty  of  the  first  bank. 

Educated  employees  and  well-equipped  bank  managers  would 
have  been  impossible  for  the  branch-bank  manager.  The  relations 
established  between  the  banker  and  his  customers  would  have  been 
impossible  for  the  branch-bank  manager.  He  could  not  have  that 
liberty  of  action  which  has  made  the  success  of  the  independent 
banker.  It  is  true  that  the  independent  banker  might  not  always 
exercise  the  care  and  caution  which  would  be  imposed  upon  the 
branch  banker.  At  times  his  sympathies  might  run  away  with  his 
judgment  and  loss  and  disaster  would  be  the  penalty;  but  where 
there  has  been  one  case  with  this  result  there  have  been  a  dozen 
with  the  opposite  result  of  success  and  profit  which  would  be 
equally  impossible  of  realization   for  the  branch  banker. 

Many  of  the  most  successful  and  prosperous  financiers  and  busi- 
ness men  of  the  country  acknowledge  that  they  owe  their  success 
to  the  timely  assistance  of  some  friendly  banker,  who,  instead  of 
demanding  security  or  scrutinizing  closely  the  security  offered  for 
loan,  has  shut  his  eyes  to  what  he  knew  did  not  exist  and  has 
accepted  for  his  sole  security  the  trust  and  confidence  he  reposed  in 
the  man.  What  do  such  customers  as  these  care  about  interest 
rates?  They  need  the  money  to  finance  some  enterprise  from  which 
profits  are  expected,  which  will  make  the  interest  charge,  no  matter 
how  large  it  may  be,  a  mere  pittance  in  comparison.     Such  instances 


282  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

as  these  have  been  frequent.  I  have  no  doubt  that  nearly  all  of  you 
can  recall  cases  of  the  kind  in  your  own  experience. 

Air.  Mulhall,  who  is  an  authority  upon  the  subject,  states  that  in 
1900  the  banking  power  of  the  United  States  exceeded  that  of  the 
United  Kingdom  of  Great  Britain  and  Ireland  and  all  Europe  put 
together.  The  banking  power  of  the  single  State  of  Massachusetts 
is  almost  double  that  of  Canada,  although  it  has  only  about  one-half 
of  its  population.  The  clearings  of  the  banks  of  Kansas  City  alone 
are  almost  double  those  of  all  the  banks  of  Canada.  Judged  only  by 
these  figures,  which  indicate  the  actual  work  performed  and  the 
service  rendered,  the  conclusion  is  inevitable  that  our  American 
system  of  banking,  notwithstanding  its  admitted  imperfections,  its 
shortcomings  and  its  weaknesses — which  in  time  may  all  be  remedied 
— is  superior  to  any  system  of  banking  in  the  world. 

This  so-called  reform  in  banking  is  proposed  and  urged  by  well 
meaning  men,  but  men  who  in  almost  every  case  will  be  found  to 
be  guided  solely  by  their  environments,  and  not  by  any  experience 
obtained  along  the  lines  of  this  strenuous  life  to  which  is  due  the 
existence  of  our  American  banking  system.  The  passage  of  the 
amendment  proposed,  by  destroying  the  harmonious  relations  which 
now  exist  in  our  banking  world  and  by  threatening  the  existence  of 
our  present  organized  banks,  would  not  only  be  disastrous  to  the 
banks  concerned,  but  would  be  a  national  calamity. 


BRANCH  BANKING 

ADDRESS  DELIVERED  BY  WILLIAM  A.  NASH,  PRESIDENT  OF  THE  CORN  EXCHANGE 
BANK,  NEW  YORK,  BEFORE  THE  NEW  YORK  STATE  BANKERS'  ASSOCIATION, 
AT  NEW  YORK  IN  OCTOBER,   1002. 

In  1893  I  had  the  honor  of  being  a  member  of  the  most  impor- 
tant loan  committee  ever  appointed  by  the  New  York  Clearing  House. 
Within  a  year,  two  of  the  members  of  that  committee  have  departed 
this  life.  The  lamented  chairman,  Frederick  D.  Tappen,  will  always 
be  held  in  the  most  grateful  and  admiring  remembrance.  The 
opportunities  that  I  had  of  observing  his  courage,  his  sagacity,  and 
his  ability  were  very  many,  and  I  am  sure  his  associates  will  ever 


BANKING  REFORM  AND  CURRENCY  SECTION  283 

recall  the  strength  and  vigor  with  which  he  approached  the  problems 
that  were  every  day  presented  to  us  during  that  disturbed  time. 
Peace  to  his  honored  memory ! 

The  Loan  Committee  of  the  New  York  Clearing  House  becomes 
in  a  financial  crisis  the  center  of  all  the  woes  and  trials  of  those 
unhappy  seasons.  It  is  by  force  of  circumstances  the  trusted 
repository  of  the  weaknesses  and  wants  of  the  banks,  and  its  sym- 
pathies and  resources  are  appealed  to  day  by  day.  Every  morning 
brings  a  fresh  batch  of  needs,  and  the  ingenuity  of  the  financier  is 
taxed  to  apply  the  remedy  and  assist  in  keeping  the  wheels  on  the 
track.  I  mention  my  connection  with  this  memorable  committee 
to  explain  how  some  of  the  facts  that  came  to  its  knowledge  in  1893 
had  the  effect  of  turning  my  attention  to  branch  banking. 

The  Clearing  House  loan  certificate,  now  so  famous  as  an  effec- 
tual remedy  for  strained  conditions  in  finance,  can,  in  the  nature  of 
things,  be  used  and  appropriated  directly  only  by  the  members  of 
the  Clearing  House  Association.  They  are  issued  only  to  the  Asso- 
ciated Banks,  and  their  circulation  is  prohibited  beyond  these  banks. 
The  outside  banks  can  participate  in  the  help  these  certificates  afford 
in  an  indirect  way  only  and  not  as  a  matter  of  right.  So  long  as 
the  Clearing  House  banks  were  so  disposed,  the  assistance  thev 
received  at  such  times  by  the  issue  of  certificates  was  shared  with 
banks  connected  with  them,  but  this  consideration  was  given  as  a 
gratuity  and  not  as  a  right.  The  position  of  the  non-member  bank 
thus  became  one  of  great  uncertainty  and  anxiety,  and  I  think  it 
will  be  recalled  by  every  institution  that  in  1893  was  using  our  Clear- 
ing House  indirectly  and  with  no  right  to  its  privileges,  that  their 
situation  was  unenviable,  unsafe,  and  unhappy.  They  were  the 
wards  of  institutions  already  heavily  burdened  with  their  own  cares, 
and  anxious  to  lessen  those  cares  as  much  as  thev  could.  The  non- 
member  bank  was  then  in  the  painful  position  of  existing  by  suffer- 
ance. Their  Clearing  House  representative  would  willingly  have 
given  up  the  agency,  and  there  were  none  who  were  anxious  to 
adopt  them,  had  they  been  thrown  off.  This  state  of  affairs  con- 
tinued for  several  months,  when  the  redemption  of  the  certificates 
restored  things  to  their  normal  condition  and  released  the  outside 
banks  from  their  unpleasant  situation.  Their  solvency  was  in  no 
wise  affected  or  questioned.     It  was  simply  their  isolation  and  want 


284  PRACTICAL  PROBLEMS  IN  RANKING  AND  CURRENCY 

of  close  union  with  the  great  banks  that  placed  them  in  this  unsat- 
isfactory position. 

The  dilemma  in  which  these  banks  were  placed  disturbed  me 
very  keenly,  as  I  was  connected  not  only  with  the  Loan  Committee, 
but  also  with  several  of  these  exterior  banks,  as  a  member  of  their 
Board  of  Directors.  Indeed,  the  most  trying  and  exhausting 
financial  crisis  that  I  remember  was  the  so-called  panic  of  1893. 

Naturally  such  experience  leads  thinking  men  to  devise  remedies 
for  the  future.  The  Clearing  House  machinery  has  not  arrived 
at  its  present  efficiency  without  many  changes  and  improvements. 
Every  emergency  has  added  to  the  skill  with  which  the  next  one  has 
been  handled.  To  my  mind,  the  lesson  of  1893  was  the  need  of 
additional  protection  to  the  non-member  banks  in  financial  crises. 
There  were  two  ways  in  which  it  could  be  done.  One  was  to 
become  a  member  of  the  Clearing  House  Association.  The  require- 
ments, however,  of  that  membership  are,  very  wisely,  made  exacting. 
No  bank  with  small  capital  or  resources  can  hope  for  admission  to 
a  partnership  on  an  insufficient  contribution  to  its  strength,  and  so 
the  association  has  fixed  a  limit  which  a  large  majority  of  the  small 
banks  scattered  over  the  city  are  unable  to  approach.  The  other 
way  was  by  association  among  themselves ;  but  that  could  be 
accomplished  only  by  a  union  of  capital,  and  for  this  a  large  central 
bank  with  branches  seemed  to  me  to  be  the  only  solution. 

I  am  free  to  say  that  the  branch  banking  organized  by  the  Corn 
Exchange  Bank  is  the  application  of  common-sense  to  a  situation, 
and  nothing  more.  There  is  no  royal  patent  of  ideas  in  the  matter. 
It  is  a  system  such  as  any  intelligent  banker  could  reason  out  and 
apply.  I  grant  you  that  the  reasoning-out — the  academic  portion — 
was  the  easier  part,  and  can  be  communicated  to  you  in  this  address. 
But  the  application  of  those  ideas  to  existing  conditions  became  a 
much  more  serious  matter,  and  here,  as  always,  the  practical  work- 
ing is  a  matter  of  individual  talent,  which  we  all  know  is  so  difficult 
to  discover  and  secure. 

The  idea  suggested  by  my  observations  in  1893  was  this:  As 
the  New  York  Clearing  House  then  associated  all  its  members 
together  in  practically  one  bank,  and  unified  all  the  capital  and 
resources  to  meet  an  emergency,  so  it  might  and  should  be  possible 
that  the  very  useful  small  institutions  scattered  over  the  city  should 


BANKING  REFORM  AND  CURRENCY  SECTION  285 

be  able  to  rely  upon  one  central  bank  for  their  help  and  support  in 
troublous  times ;  that  one  bank  with  sufficient  capital  should  assume 
to  these  smaller  banks  the  same  position  of  protection  that  the  Clear- 
ing House  did  to  its  members.  So  that  the  logical  position  is  that 
branch  banking  is  the  permanent  extension  to  small  institutions  of 
that  support  that  is  given  to  the  Clearing  House  banks  when  they 
join  together  in  financial  panics  and  pool  their  resources  for  mutual 
protection.  In  1898  there  was  passed  by  the  New  York  Legislature 
an  act  authorizing  branch  banking  that  is  so  brief  and  compre- 
hensive that  I  will  read  it  in  full : 

No  bank  in  this  state,  or  an  officer  or  director  thereof,  shall  open  or 
keep  an  office  of  deposit  or  discount  other  than  its  principal  place  of  business, 
except  that  any  bank  located  in  a  city  of  over  one  million  inhabitants,  accord- 
ing to  the  last  state  or  Federal  enumeration,  and  whose  certificate  of  incor- 
poration shall  so  provide,  may  open  and  keep  one  or  more  branch  offices  in 
such  city  for  the  receipt  and  payment  of  deposit,  and  for  making  loans  and 
discounts  to  the  customers  of  such  branch  offices  only;  provided,  however, 
that  before  opening  any  branch  office  the  approval  in  writing  of  the  Superin- 
tendent of  Banks  shall  be  first  obtained,  and  no  loans  or  discounts  shall  be 
made  except  such  as  may  have  been  previously  authorized  by  the  Board  of 
Directors.  Every  such  officer  or  director  violating  the  provisions  of  this  sec- 
tion shall  forfeit  to  the  people  of  the  state  the  sum  of  one  thousand  dollars 
for  every  such  violation. 

This  act  owes  its  existence  to  the  suggestions  of  Mr.  R.  H. 
McCurdy,  president  of  the  Mutual  Life  Insurance  Company  of 
New  York,  and  was  framed  by  Mr.  Joseph  S.  Auerbach,  a  well- 
known  lawyer  of  this  city.  When  its  terms  became  known  to  me, 
I  saw  that  the  opportunity  of  accomplishing  that  which  was  so  much 
needed  in  the  panic  of  1893  had  arrived.  I  saw  also  the  opportunity 
not  only  for  a  system  for  protection  in  dangerous  times,  but  one  for 
efficiency  and  economy  of  operation  in  all  times ;  and  so  the  bank 
with  which  I  am  connected  determined  to  take  advantage  of  a  law 
so  salutary.  Other  New  York  institutions  are  also  availing  them- 
selves of  the  privilege  of  the  law,  and  in  due  time  I  look  to  see  the 
conversion  of  small  banks  into  branches,  and  the  creation  of  new 
branches  to  go  on  until  every  part  of  the  city  is  furnished  with  bank- 
ing facilities  of  a  character  strong  enough  and  competent  to  meet 
every  demand  that  may  be  made  upon  it.  The  state  law,  of  course, 
allows  the  privilege  of  branch  banking  to  state  institutions  only.  A 
majority  of  the  small  institutions  outside  the  Clearing  House  are 


286  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

under  the  state  law.  Our  method  has  been  to  absorb  existing 
banks  by  the  retirement  of  their  capital,  and  to  start  new  branches 
in  localities  where  it  has  seemed  to  us  there  was  a  field  for 
additional  banking  facilities.  We  have  in  this  way  terminated 
the  corporate  existence  of  seven  banks  within  the  limits  of  New 
York  City  and  have  opened  an  equal  number  of  new  branches, 
so  that  at  present  we  have,  in  addition  to  the  main  bank,  fourteen 
branches.  You  will  readily  understand  that  under  the  New  York 
law  a  bank  with  branches  is  simply  a  bank  which,  for  the  convenience 
of  depositors,  opens  offices  in  any  part  of  the  city.  The  capital  of 
the  parent-bank  applies  equally  to  each  branch,  and  covers  the  lia- 
bility to  every  depositor  no  matter  where  he  may  be  located.  A 
dealer  in  the  newest  and  most  remote  part  of  the  city  dealing  with 
such  a  branch  is  as  fully  protected  by  the  capital  as  if  he  was  in  the 
center  of  affairs  and  doing  a  large  business  with  the  central  bank. 
It  is  the  extension  to  a  myriad  of  small  depositors  of  the  protection 
of  a  large  capital  and  surplus  that  constitutes  the  leading  merit  of 
the  branch  system.  The  branch,  through  the  main  bank,  has  also 
all  the  advantages  of  the  Clearing  House,  the  value  of  which  fran- 
chise is  now  so  highly  estimated.  It  therefore  follows  that  the 
embarrassments  that  have  in  the  past  attended  small  institutions  in 
times  of  financial  stress  are  very  much  modified  and  lessened  by  a 
legalized  system  of  association,  such  as  is  now  termed  "branch 
banking." 

As  bankers  you  readily  comprehend  the  statements  I  have  made 
relative  to  the  motive  and  value  of  association  under  one  capital, 
and  you  must  also  be  alive  to  the  advantages  of  a  central  manage- 
ment. I  have  remarked  on  the  desirability  of  securing  executive 
talent.  All  lines  of  business  are  engaged  in  this  quest.  There  is 
no  need  of  able  and  energetic  men  going  without  employment  or 
good  salaries.  In  our  branch  systems  we  are  keeping  a  keen  look- 
out for  bright,  thinking  men,  who  are  desirous  of  making  their  way 
in  their  business.  In  the  banks  which  have  become  branches  by 
giving  up  their  corporate  existence,  we  have  been  glad  to  retain 
every  capable  man,  and  practically  we  have  not  reduced  the  force  in 
any  of  the  banks  so  adopted.  When  we  have  created  new  branches, 
competent  men  have  been  in  request  and  have  had  the  first  chance 
as  managers,  tellers,  etc 


BANKING  REFORM  AND  CURRENCY  SECTION  287 

The  officer  of  a  branch,  of  course,  has  a  more  limited  sphere  of 
action  than  the  officers  of  a  bank,  but  none  the  less  is  the  require- 
ment of  ability  and  judgment.  He  has  not  the  care  of  his  reserve, 
for  that  is  attended  to  at  headquarters.  He  is  ».  ~>t  worried  by  an 
excess  of  uninvested  funds,  and  compelled  to  go  down-town  to  buy 
paper  or  find  good  collateral  loans,  for  his  surplus  is  massed  in  the 
main  bank  and  is  handled  there.  This  prevents  duplication  of  lines 
to  borrowers,  and  concentrates  the  management  of  unemployed 
money  in  one  experienced  department,  rather  than  commit  it  to  a 
number  of  officers  who  may  lack  the  knowledge  that  is  at  the  com- 
mand of  large  central  institutions. 

The  manager  of  a  branch  is  expected  to  do  three  things — to 
attract  and  accumulate  deposits,  to  keep  down  expenses,  and  to 
master  the  credits  of  his  own  customers.  The  central  bank  on  its 
part  superintends  and  scrutinizes  those  credits,  and  approves  or  dis- 
approves new  lines  of  discounts,  or  enlargement  of  old  lines.  From 
each  branch  it  calls  daily  for  a  statement  of  its  condition,  of  the 
loans  and  discounts  made,  the  overdrafts,  and  the  differences  in 
cash.  The  character  of  the  cash  on  hand  is  also  reported,  the  new 
accounts  that  may  have  been  opened,  and  those  which  have  been 
closed,  with  the  reason  therefor;  also  the  notes  which  have  been 
paid  during  the  day.  In  brief,  the  main  bank  knows  by  the  reports 
of  the  managers  the  exact  condition  of  the  entire  system  at  the  close 
of  business  the  night  before.  The  superintendence  of  the  central 
bank  goes  still  farther.  There  is  a  thorough  method  of  inspection. 
Committees  of  clerks  of  one  branch  are  detailed  to  examine  another 
branch,  and  often  in  this  way  the  entire  bank  is  completely  examined 
in  one  day.  These  examinations  are  made  without  notice,  and  are 
frequent  enough  to  accomplish  the  object  without  being  an  annoy- 
ance. A  system  of  changes  of  clerks  from  one  position  to  another 
or  from  one  branch  to  another,  and  compulsory  vacation  of  every 
employee  at  least  once,  and  in  some  cases  twice,  a  year,  has  been 
found  serviceable  in  promoting  correctness  and  efficiency.  The  col- 
lection of  out-of-town  checks  is  consolidated  into  the  parent-bank, 
and  there  they  are  forwarded  to  the  various  correspondents  through- 
out the  country,  and  are  thus  kept  under  better  observation  than  if 
each  branch  attended  to  its  own  work.     It  is  impossible  under  such 


288    'PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

a  system  of  reports  and  inspection  that  there  should  be  a  duplication 
of  credits  or  loans. 

All  this  complicated  machinery,  involving  as  it  does  a  vast 
amount  of  detail,  would  work  badly  but  for  the  help  of  the  tele- 
phone. The  managers  of  a  branch  are  thus  in  instant  communica- 
tion with  the  central  office,  and  consultations  are  continually  going 
on.  How  much  intelligence  and  grasp  of  the  system  is  necessary 
to  a  successful  working  you  as  practical  bankers  can  easily  divine. 
It  is  no  boys'  play,  but  when  organized  by  experienced  banking  men 
the  ease  with  which  a  vast  amount  of  additional  detail  can  be 
handled  is  almost  incredible. 

I  do  not  know  whether  I  have  succeeded  in  giving  you  a  very 
clear  idea  of  the  process  by  which  the  varied  interests  in  diverse 
branches  can  be  gathered  together  at  one  point  and  directed  with 
ease  and  success.  It  is  a  matter  of  development  and  evolution. 
We  have  found  it  to  work  with  facility,  but  only  after  a  great  many 
experiments  and  sifting-out  of  impracticable  methods  from  those 
which  were  found  to  be  entirely  suitable  and  efficient.  Therefore, 
when  it  is  asserted  that  branch  banking  on  paper  can  be  made  a  very 
beautiful  and  symmetrical  affair,  it  is  quite  true.  It  is  also  true 
that  it  can  be  made  a  success  in  practice ;  though  here,  as  said 
before,  the  element  of  personal  ability  comes  in  very  largely. 

It  was  this  view  of  the  matter  that  led  us,  in  forming  the  system 
of  branch  banking,  to  depend  not  on  what  had  been  done  in  England, 
or  France,  or  Germany,  or  Canada,  but  to  work  out  the  system  here 
in  America;  and  we  did  not  need  to  go  to  books  or  precedents  to 
discover  that  a  bank  with  branches  is  simply  one  great  bank  with  its 
sphere  of  action  scattered  over  a  certain  area,  but  controlled  and 
governed  as  absolutely  as  if  all  the  clerks,  books,  cash,  and  deposit- 
ors were  gathered  into  one  building. 

Whether  the  sphere  of  branch  banking  could  be  extended  beyond 
a  great  and  homogeneous  city  I  am  not  prepared  to  say.  Theoreti- 
cally it  would  seem  to  be  possible,  but  all  of  us  are  familiar  with  the 
way  theories  are  sometimes  affected  by  hard  and  unlooked-for  facts, 
and  it  is  a  question  in  my  mind  whether  local  pride,  prejudice,  inter- 
ests, and  peculiarities  will  not  be  too  strong  for  that  desirable  unity 
which  we  find  possible  in  a  city  where  a  branch  can  be  visited  and 


BANKING  REFORM  AND  CURRENCY  SECTION  289 

inspected  every  day,  and  the  managers  and  clerks  are  easily  observ- 
able and  mingle  together. 

Of  its  favorable  working  in  a  great  city,  under  the  conditions  I 
have  cited,  I  have  now  no  manner  of  doubt.  It  is  true  that  the 
experiment  has  thus  far  been  tried  under  prosperous  and  favoring 
conditions.  We  have  been  sailing  before  the  wind  now  for  several 
years.  The  skies  are  still  bright,  but  squalls  are  not  impossible,  and 
some  day  there  may  be  a  storm.  In  these  disturbed  seasons,  which 
are  by  no  means  obsolete  because  they  are  out  of  fashion,  the 
question  of  how  branch  banking  will  ride  out  the  gale  has  occurred 
to  no  one  oftener  than  to  the  speaker.  It  seems  to  me  that  the 
dangers  to  the  creditors  of  the  banks  have  not  increased,  but,  on 
the  contrary,  the  guarantees  given  to  depositors  have  been  mul- 
tiplied and  strengthened  by  this  union  of  small  institutions  under 
one  strong,  responsible  head.  We  have  not  ignored  or  been 
unmindful  of  criticisms  that  have  been  made  on  this  new  form  of 
banking.  It  has  been  claimed  that  the  small  local  borrower  would 
suffer  by  the  control  of  a  strong  and  remote  central  bank,  and 
that  the  accommodations  would  be  curtailed  by  the  use  of  funds  in 
larger  and  more  profitable  ventures.  This  is  a  mistake  and  a  fallacy. 
The  small  loans  are  very  often  the  best;  certainly  the  risk  of  loss 
is  limited,  and  the  rates  paid  for  money  are  higher  than  in  the 
centers  where  the  dollars  most  do  congregate.  I  can  compare  the 
funds  placed  at  the  disposal  of  the  main  bank  by  the  branches  to  an 
army  held  in  reserve  for  help  and  assistance  at  points  where  it  is 
most  needed.  At  times  one  branch  makes  heavy  demands  for 
money ;  again  it  contributes  largely,  and  some  other  department  gets 
the  use  of  its  unneeded  funds.  The  ability  to  move  money  to  points 
where  a  good  demand  exists  is  certainly  an  improvement  on  the  old 
system  which  I  have  described  as  existing  in  1893. 


19 


jiyo     PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

ASSET  CURRENCY 

ADDRESS  DELIVERED  BY  HORACE  WHITE,  FORMERLY  EDITOR  OF  THE  NEW  YORK 
EVENING  POST,  NEW  YORK,  BEFORE  THE  AMERICAN  BANKERS'  ASSOCIA- 
TION,   AT    NEW    ORLEANS,    NOVEMBER,    1002. 

Your  Executive  Committee  has  asked  me  to  say  a  few  words 
here  on  the  subject  of  "Asset  Currency  and  Branch  Banking."  My 
views  on  the  latter  subject  were  presented  at  some  length  at  a  bank- 
ers' convention  in  Kansas  City  a  few  months  ago,1  and  as  they  were 
published  in  several  bank  periodicals,  it  would  be  needless  to  repeat 
them  now.  At  Kansas  City  I  spoke  in  favor  of  the  plan  of  asset 
currency  proposed  by  the  Indianapolis  Monetary  Commission  four 
or  five  years  ago.  That  plan  was  introduced  in  the  House  of  Repre- 
sentatives in  1898,  but  was  not  brought  to  a  vote  or  to  general 
debate.  A  modification  of  it  was  introduced  in  the  House  by  Mr. 
Lovering  of  Massachusetts  two  years  later,  but  was  not  acted  on. 
A  bill  embodying  the  principle  of  asset  currency,  but  differing  in 
important  details  from  the  Indianapolis  plan,  was  reported  by  the 
House  Committee  on  Banking  and  Currency  on  the  5th  of  April 
last.  This  is  known  as  the  Fowler  bill.  It  is  the  one  which  now, 
for  the  most  part,  engages  the  attention  of  those  persons  who  give 
any  attention  to  the  subject  at  all. 

Before  going  further,  we  had  best  tell  what  we  mean  by  asset 
currency.  This  is  a  phrase  peculiar  to  our  own  country.  Properly 
speaking,  all  bank  notes  are  asset  currency,  since  their  goodness 
depends  upon  the  assets  of  the  issuing  bank.  This  is  true  of  our 
own  national  bank  notes,  since  the  bonds  deposited  in  the  treasury 
as  security  for  them  are  assets  of  the  issuing  bank.  So  the  distinc- 
tive feature  of  asset  currency,  as  we  use  the  term,  is  that  the  bank 
itself  holds  all  the  assets  on  which  the  goodness  of  the  notes  depends, 
instead  of  depositing  some  part  of  them  in  the  public  treasury.  The 
reason  for  lodging  a  portion  of  them  in  the  treasury  is  to  guard 
against  loss  through  bad  investment,  fraudulent  management,  or 
robbery.  These  banking  risks  exist  always  and  everywhere.  Yet 
asset  currency  prevails  in  all  civilized  countries  except  the  United 
States  and  that  part  of  Great  Britain  called  England.  It  exists  in 
Scotland  and  Ireland,  as  well  as  on  the  continent  of  Europe.  Bank 
notes  secured  by  assets  not  under  the  control  of  the  issuing  bank  are 
the  very  rare  exception  to  a  general  rule. 

1  See  the  address  by  Horace  White  on  "Branch  Banking,"  on  page  254. 


BANKING  REFORM  AND  CURRENCY  SECTION  291 

I  shall  first  glance  at  the  Fowler  bill.1  I  am  glad  that  Mr. 
Fowler  is  here  to  speak  for  his  own  measure,  because  he  is  well 
equipped  for  that  task.  He  and  I  have  discussed  his  plan  together, 
both  verbally  and  in  writing.  While  entertaining  high  opinion  of 
his  abilities  and  sympathy  with  his  aims,  I  have  not  been  able  to  give 
entire  approval  to  the  details  of  his  measure,  and  this  has  been  a 
source  of  keen  regret  to  me  because  we  have  fought  battles  together 
for  sound  money  these  many  years. 

By  the  first  section  of  the  bill  a  division  of  banking  and  currency 
is  established  in  the  Treasury  Department  under  the  charge  of  a 
board  of  three  comptrollers.  There  is  already  a  bureau  of  this  kind 
in  the  Treasury  Department  under  the  charge  of  a  single  officer. 
The  difference  between  the  one  now  existing  and  the  one  proposed, 
so  far  as  the  bill  itself  enlightens  us,  is  simply  a  difference  in  the 
number  of  persons  to  be  consulted  in  reaching  decisions.  I  can  see 
no  more  reason  for  having  three  Comptrollers  of  the  Currency  than 
for  having  three  Secretaries  of  the  Treasury,  but  I  admit  that  this  is 
not  a  very  important  matter. 

The  second  section  provides  that  if  any  national  bank  shall 
assume  the  current  redemption  of  an  amount  of  United  States  notes 
equal  to  20  per  cent,  of  its  paid  capital,  it  shall  have  the  right  to  issue 
circulating  notes,  not  secured  by  United  States  bonds — to  issue  them 
at  various  times,  in  varying  amounts  and  at  varying  rates  of  taxa- 
tion. I  shall  not  occupy  your  time  with  the  details  of  issue.  If  a 
bank  with  a  capital  of  $100,000  shall  assume  the  current  redemption 
of  $20,000  of  the  existing  greenbacks,  it  shall  have  the  right  to 
issue,  at  certain  intervals  of  time,  $100,000  of  its  own  circulating 
notes ;  but  all  the  notes  above  $60,000  are  styled  emergency  circula- 
tion, and  are  made  subject  to  a  tax  heavy  enough  to  make  it  certain 
that  they  will  be  issued  only  in  time  of  trouble,  rind  will  be  retired 
as  soon  as  the  emergency  passes  away.  In  order  to  identify  the 
United  States  notes  that  each  bank  shall  currently  redeem,  they  must 
In-  stamped  on  their  backs  with  the  name  and  promise  of  the  par- 
ticular bank.  So  if  all  the  banks  should  join  in  the  arrangement. 
there  would  be  upwards  of  four  thousand  particular  lots  of  green- 
backs in  the  country.  They  might  be  in  circulation,  or  they  might 
be  in  the  banks'  reserves  or  in  both.      It  is  doubtless  the  intention  of 

'  See  House  Bill  No.  13363,  1st  session  57th  Congress. 


292  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

Mr.  Fowler  that  they  shall  be  mostly  in  the  vaults  of  the  hanks 
responsible  for  them,  and  thus  it  would  come  to  pass  that  the  bank 
reserves  would  be  composed  of  bank  liabilities  to  the  extent  that 
these  stamped  greenbacks  were  held  by  them.  I  confess  I  do  not 
know  what  the  effect  of  such  an  arrangement  would  be  in  a  time  of 
great  stringency,  when  the  banks  should  be  compelled  to  pay  out 
their  reserves,  or  in  case  of  a  large  exportation  of  gold.  The  gov- 
ernment's responsibility  for  these  notes  is  not  changed  by  the  bill. 
It  must  still  redeem  them  on  demand,  but  having  done  so,  it  may 
demand  redemption  of  them  again  by  the  bank.  Thus,  in  an 
imaginable  case,  there  would  be  a  stream  of  stamped  greenbacks 
issuing  from  the  banks,  flowing  to  the  treasury,  and  back  to  the 
banks,  and  being  redeemed  twice  in  the  circuit,  and  then  repeating 
the  circuit.  If  gold  were  wanted  for  export,  this  would  be  the 
most  likely  method  of  obtaining  it,  since  by  presenting  the  notes  en 
bloc  to  the  treasury  the  holders  would  be  spared  the  trouble  of 
sorting  them.  But,  as  I  said  before,  I  do  not  know  what  would  be 
the  consequence  of  having  the  banks'  reserves  composed  in  part  of 
their  own  liabilities,  and  I  do  not  venture  to  make  predictions.  The 
plan  might  work  well,  or  it  might  not. 

Each  of  the  banks  entering  into  this  arrangement  is  required  to 
present  to  the  treasury  its  quota  of  United  States  notes  to  be  stamped 
as  aforesaid,  and  at  the  same  time  to  present  one-half  as  many  more 
to  be  redeemed  by  the  treasury  and  canceled.  The  capital  of  all 
the  national  banks  will  soon  reach  $700,000,000.  If  all  should  enter 
into  the  arrangement  the  amount  of  greenbacks  endorsed  would  be 
$140,000,000,  and  of  those  redeemed  and  canceled  $70,000,000, 
leaving  $146,000,000  outstanding.  The  amount  of  gold  in  the 
redemption  division  of  the  treasury  would  thus  be  reduced  to 
$80,000,000,  and  under  the  existing  law  the  Secretary  of  the  Treas- 
ury would  be  obliged  to  restore  it  to  $150,000,000.  The  bill  pro- 
vides that  when  the  banks  shall  have  assumed  the  current  redemption 
of  $130,000,000  of  United  States  notes  no  national  bank  shall  pay 
out  any  greenbacks  not  endorsed,  but  shall  present  them  to  the 
treasury  for  redemption  as  fast  as  they  are  received  in  the  course 
of  business,  and  when  redeemed  they  shall  be  canceled. 

Thus  if  the  bill  were  enacted,  and  if  the  banks  should  avail 
themselves  of  their  privileges  undei  it,  three-fifths  of  the  greenbacks 


BANKING  REFORM  AND  CURRENCY  SECTION  293 

would,  after  a  while,  be  retired  and  canceled,  and  the  other  two- 
fifths  would  be  locked  up  in  the  bank  reserves.  To  those  who  think, 
as  I  do,  that  all  of  them  ought  to  be  retired  and  the  government 
taken  out  of  the  banking  business  wholly,  this  arrangement  is 
objectionable  only  because  it  adopts  circuitous  and  dilatory  and 
roundabout  instead  of  plain  and  direct  methods.  Why  should  the 
banks  "currently  redeem"  notes  which  they  never  issued?  Why 
should  not  the  government  redeem,  both  currently  and  finally,  notes 
which  it  has  issued,  and  for  which  it  has  received  value,  and  which 
it  is  abundantly  able  to  redeem?  The  answer  to  these  questions  is 
found  in  the  report  accompanying  the  bill.  It  tells  us  that  one  of 
the  purposes  of  the  bill  is  "to  protect  the  national  credit  against 
assault  through  the  demand  obligations  of  the  government,  by  com- 
pletely relieving  the  treasury  at  once  of  a  burden  amounting  to 
more  than  seven  hundred  millions."  Protecting  the  national  credit 
against  assault,  as  the  phrase  is  here  used,  means  preventing  the 
holders  of  greenbacks  from  presenting  them  for  redemption.  There 
are  only  two  conditions  under  which  the  public  will  present  green- 
backs for  redemption.  One  is  where  there  is  a  legitimate  trade- 
balance  calling  for  gold  for  export.  The  other  is  where  fear  exists 
in  the  public  mind  that  the  government  may  be  either  unable  or 
unwilling  to  redeem  its  greenbacks. 

In  the  former  event  the  trade-balance  must  be  paid  anyhow. 
Such  balances  are  relatively  small,  and  it  is  desirable  that  the  govern- 
ment, rather  than  the  banks,  should  furnish  the  amount  needed : 
first,  because  the  government,  not  the  banks,  owes  the  money  which 
the  greenbacks  call  for ;  second,  because  every  dollar  of  gold  taken 
from  the  banks  depletes  their  reserves  and  lessens,  by  as  much  as  four 
dollars,  their  ability  to  make  advances  to  the  business  community. 

In  the  other  event — that  is,  in  the  case  of  a  panic — neither  this 
measure  nor  any  other  can  prevent  a  run  on  the  treasury  for  gold, 
since  the  government  is  the  ultimate  sponsor  for  all  outstanding 
greenbacks,  whether  they  are  stamped  or  not.  The  bank  depositors, 
if  they  are  really  alarmed,  as  they  wire  in  1893-6,  will  possess  them- 
selves  of  tin-  stamped  greenbacks  and  present  them  to  the  treasury 
for  redemption.  Moreover,  the  government  might  not  to  be  relieved 
of  the  necessity  of  redeeming  its  demand  notes.  The  onus  of 
redemption   oughl    to  be   kept   constantly   upon   it.     Nations   learn 


294  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

wisdom  by  experience.  They  seldom  learn  financial  wisdom  in  any 
other  school.  The  repeal  of  the  Sherman  silver  act  was  brought 
about  by  acute  suffering.  President  Cleveland  might  have  lectured 
Congress  till  he  was  black  in  the  face;  he  could  not  have  accom- 
plished the  purpose  for  which  he  called  the  extra  session  in  1893, 
had  not  bankruptcy  been  wielding  its  lash  in  business  circles  all  over 
the  country.  If  you  want  the  greenbacks  to  continue  as  a  perma- 
nent feature  of  our  currency  system,  just  devise  some  way  to  protect 
the  government  from  the  necessity  of  redeeming  them.  If  you  want 
to  get  rid  of  them  you  must  keep  public  opinion  in  a  state  of 
anxiety  respecting  them.  I  want  to  get  rid  of  them  as  soon  as  pos- 
sible, because  they  are  political  money ;  and  any  political  party  that 
may  hereafter  find  itself  in  power  at  Washington  may  increase  the 
amount  to  a  billion  dollars,  or  any  other  sum.  1  can  remember  a 
time,  not  so  very  long  ago,  when  a  political  platform  demanded 
that  the  volume  of  money  should  be  made  "equal  to  the  wants  of 
trade,"  What  did  that  mean?  It  meant  that  the  government's 
printing  press  should  be  put  in  motion  and  kept  going  until  every- 
body had  as  many  legal  tender  notes  as  he  wanted.  You  may  say 
that  the  time  for  such  folly  has  long  since  passed  away.  I  should 
be  glad  to  think  so,  but  I  have  heard  as  great  follies  as  that  advo- 
cated on  the  stump  within  sixty  days,  in  connection  with  the  coal 
strike  in  Pennsylvania.  The  danger  of  greenback  inflation  will  last 
as  long  as  the  greenback  itself  lasts.  When  it  disappears  it  will  be 
gradually  forgotten,  like  the  continental  currency  and  the  Confeder- 
ate currency ;  but  while  it  exists  it  will  be  an  ever-present  sugges- 
tion and  impulse  to  financial  madness. 

The  bill  we  are  considering  has  a  plan  for  the  eventual  retire- 
ment and  cancellation  of  greenbacks.  I  have  already  referred  to 
the  clause  for  the  redemption,  by  the  government,  of  one-half  as 
many  greenbacks  as  the  banks  assume  to  "currently  redeem ;" 
also  the  clause  which  requires  the  banks  to  present  to  the  treasury 
for  redemption  all  the  unstamped  greenbacks  that  they  receive  in 
the  course  of  business.  There  is  a  method  also  for  eventually 
retiring  the  stamped  greenbacks.  It  is  somewhat  intricate.  A 
safety  fund  equal  to  5  per  cent,  of  all  outstanding  bank  notes  is 
established  in  the  treasury  for  the  redemption  of  failed  bank  notes. 
Into  this  fund  is  paid  also  the  tax  on  bank-note  circulation  and  the 


BANKING  REFORM  AND  CURRENCY  SECTION  295 

interest  received  by  the  treasury  on  deposits  of  public  money  in  the 
banks.  Whenever  the  accumulations  of  this  fund  from  all  sources 
exceed  10  per  cent,  of  the  amount  of  national  bank  notes  existing, 
the  excess  shall  be  applied  to  the  redemption  and  cancellation  of 
stamped  greenbacks,  beginning  with  those  last  stamped,  and  proceed- 
ing backward  in  the  reverse  order  of  their  assumption  by  the  banks. 
I  suppose  that  the  stamped  notes  would  be  redeemed  by  this  process 
at  some  time,  the  tax  on  note  circulation  being  continuous  and  the 
duration  of  the  government  (as  we  hope)  eternal;  but  at  what  time 
this  result  would  be  reached  no  man  can  say.  No  man  can  say  how 
many  banks  would  come  into  the  arrangement  at  all. 

The  bill  provides  that  the  United  States  shall  be  divided  into 
clearing-house  districts,  and  that  each  district  shall  contain  one 
clearing-house,  whose  charter,  to  run  twenty  years,  shall  be  granted 
by  the  Board  of  Control.  They  are  to  effect  clearings  between 
banks,  and  perform  "such  other  business  and  service  as  said  Board 
of  Control  may  approve."  A  clearing-house  is  defined  by  Mr.  James 
G.  Cannon  as  "a  device  to  simplify  and  facilitate  the  daily  exchange 
of  items,  and  settlement  of  balances  among  the  banks,  and  a  medium 
for  united  action  upon  all  questions  affecting  their  mutual  welfare." 
It  is  a  voluntary  association,  hampered  by  no  rules  except  those  of 
its  own  making,  and  these  it  can  abrogate  or  change  at  its  own 
pleasure.  Upon  this  liberty  of  action  its  efficiency  depends.  It  is 
now  proposed  to  make  the  clearing-houses  chartered  institutions 
subject  to  a  board  of  control  in  Washington,  and  also  subject  to  the 
process  of  the  courts  of  law.  Each  bank  will  have  its  own  twenty- 
year  charter  and  will  be  a  partner  in  another  twenty-year  charter — 
that  of  the  clearing-house  of  its  district.  This  looks  like  a  very 
complicated  scheme,  but  the  greatest  objection  to  it  is  that  it  cripples 
the  powers  of  the  clearing-house  to  take  immediate  action  in  any 
given  case.  Suppose  that  the  clearing-house  committee  desires  to 
issue  loan  certificates  in  an  emergency.  The  Board  of  Control  may 
not  think  the  emergency  sufficiently  grave  to  warrant  such  a  step. 
Or  some  bank  in  the  clearing-house  district  may  object,  and  apply 
for  an  injunction  to  prevent  it.  Under  present  conditions,  too.  the 
clearing-house  committee  can  suspend  any  member  for  any  reason 
it  deems  sufficient.  The  nature  of  such  business  requires  prompt 
decision;  but  if  the  clearing-house  becomes  a  chartered  company, 


296  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

any  bank  may  appeal  to  the  courts  whenever  any  action  is  taken 
that  is  not  to  its  liking,  and  thus  cause  delay.  But  the  acts  of  the 
clearing-house  are  generally  such  as  do  not  admit  of  delay.  If 
they  are  not  put  in  force  at  once  they  are  of  no  use.  The  only 
chartered  clearing-house  that  I  ever  heard  of  was  the  Gold  Exchange 
Bank,  which  was  incorporated  under  the  law  of  New  York  in  1867 
in  order  to  facilitate  the  business  of  buying  and  selling  gold,  during 
the  suspension  of  specie  payments.  Its  operations  were  those  of  a 
bank  and  clearing-house  united.  During  the  Black  Friday  con- 
spiracy of  1869,  it  was  put  in  the  hands  of  a  receiver  by  Judge  Car- 
dozo,  at  the  suit  of  a  bogus  claimant ;  all  clearings  were  forbidden ; 
and  the  fees  of  lawyers  and  receivers,  amounting  to  $100,000,  were 
paid  out  of  the  assets. 

Now,  why  should  we  adopt  indirect  methods,  instead  of  direct 
ones,  either  to  get  rid  of  the  greenbacks  or  to  establish  a  system  of 
asset  currency?  The  straight  method  would  be  to  provide  that  the 
government  shall  use  a  certain  portion  of  its  surplus  revenue  to  pay 
and  retire  its  past-due  notes,  and  that  the  banks  shall  issue  their  own 
notes  according  to  the  safety  fund  plan.  There  is  really  no  reason 
why  these  two  things  should  be  coupled  together  at  all.  The  one 
is  not  necessarily  contingent  upon  the  other,  but  when  either  or 
both  shall  be  embodied  in  legislation  it  is  my  opinion  that  they  will 
command  more  votes  in  Congress  and  in  the  country  if  they  are 
direct  and  easily  understood  than  if  they  are  roundabout  and 
obscure. 

That  asset  currency  will  come,  I  have  not  the  least  doubt.  It 
will  come  because  it  will  be  a  necessity.  The  yearly  spasm  in  the 
money  market,  in  connection  with  the  crop  movement,  would  force 
Congress  to  act  eventually,  even  if  nothing  else  should.  Why  should 
we  have  such  a  yearly  spasm,  any  more  than  Canada?  She  has  a 
harvest  time  also,  but  she  has  no  more  constriction  of  the  money 
market  in  the  fall  than  in  the  spring.  All  seasons  are  the  same  to 
her,  because  her  banks  can  issue  their  notes  in  the  amounts  and  at 
the  times  and  places  where  they  are  wanted.  The  Canadian  banks 
can  create  the  crop-moving  currency  when  it  is  needed,  or  rather 
they  can  keep  it  on  hand  without  expense  to  themselves,  and  put  it 
out  when  it  is  called  for.  We  can  do  nothing  but  send  it  from  one 
place  to  another,  perhaps  a  thousand  miles  apart,  and  send  it  back 


BANKING  REFORM  AND  CURRENCY  SECTION  297 

another  thousand  miles  after  it  has  performed  its  office;  and  if 
there  is  not  enough  to  go  around,  we  must  import  gold  to  supply  the 
deficiency. 

But  there  is  another  force  operating  to  bring  asset  currency  to 
the  front,  and  that  is  the  gradual  extinction  of  the  national  debt, 
upon  which  the  present  currency  is  based.  Fifteen  million  dollars 
of  the  bonds  of  1925  were  taken  by  the  Secretary  of  the  Treasury 
for  the  sinking  fund  a  few  days  ago.  The  debt  is  shrinking  all  the 
time,  and  as  the  amount  becomes  smaller  the  market  price  of  the 
remainder  increases.  Private  investors  are  constantly  bidding 
against  the  banks.  They  are  buying  bonds  out  of  your  own  hands. 
They  are  making  it  more  profitable  for  you  to  retire  your  circula- 
tion than  to  keep  it.  This  condition  will  be  intensified  as  years  roll 
on.  The  basis  of  bank  notes  issued  on  the  present  plan  will  dis- 
appear, and  then  asset  currency  will  be  a  necessity  unless  we  are  to 
have  a  currency  consisting  merely  of  government  notes  and  gold 
certificates. 

Asset  currency  ought  to  be  better  than  government  notes,  because 
the  assets  of  the  banks  consist  of  the  circulating  properties  of  the 
country.  If  these  assets  are  not  good,  nothing  is  good.  If  they 
were  not  good,  the  government  could  not  long  exist.  The  assets  of 
the  banks  are  partly  cash  and  partly  claims  upon  the  producers  and 
holders  of  the  country's  wealth  of  every  description.  The  govern- 
ment has  nothing  but  the  right  to  tax,  and  this  is  effectual  only  in 
so  far  as  the  producing  power  of  the  country,  in  which  the  capital 
and  deposits  of  the  banks  are  invested,  is  profitably  employed. 
France  is  a  rich  country,  but  the  Bank  of  France  is  much  stronger 
financially  than  the  government,  as  has  been  proved  in  more  than  one 
crisis  of  that  country's  history.  There  are  other  reasons  why  banks 
are  more  fit  than  the  government  to  supply  the  nation's  currency. 
They  are  credit-dealing  institutions,  lending  institutions,  business 
institutions.  The  treasury,  when  it  issues  currency,  is  simply  a  bor- 
rower, and  it  can  never  be  anything  else  unless  it  attempts  to  dis- 
count commercial  paper,  which  nobody  has  yet  proposed,  and  which 
no  sane  hanker  would  consider  possible  under  our  form  of  govern- 
ment. Although  the  assets  of  the  hanks  as  a  whole  are  good,  it 
does  not  follow  that  those  of  each  individual  bank  are  good.  There 
will  always  he  a  certain  percentage  of  bankers  so  eager  for  profit 


298     PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

that  they  will  not  keep  the  necessary  reserve  against  their  liabilities. 
Hence  there  will  always  be  a  certain  percentage  of  bank  failures. 
But  no  system  of  asset  currency  which  contains  the  possibility  of 
depreciated  bank  notes  can  have  any  chance  of  adoption  in  this  coun- 
try. The  failure  of  one  bank,  if  its  notes  were  not  provided  for 
and  kept  at  par,  would  discredit  the  whole  system,  because  it  would 
put  every  noteholder  to  the  necessity  of  examining  the  contents  of 
his  pocket-book,  and  scrutinizing  all  the  notes  offered  to  him  in 
trade,  and  perhaps  keeping  a  bank-note  reporter  at  his  elbow  to 
determine  the  goodness  of  the  paper  money  in  circulation,  as  was 
customary  before  the  Civil  War.  I  shall  not  go  into  details  on 
this  subject — time  does  not  permit — but  I  consider  the  Indianapolis 
plan  of  asset  currency  bomb-proof  as  regards  the  safety  of  note 
issues,  and  I  think  that  the  Fowler  bill  is  also. 

There  are  some  superstitions  prevailing  in  the  public  mind,  and 
in  the  banking  mind  also,  regarding  bank  notes.  It  is  commonly 
believed  that  it  would  be  dangerous  to  allow  a  bank  to  issue  notes 
exceeding  the  amount  of  its  paid  capital,  and  that  anything  above 
60  or  80  per  cent,  of  its  capital  ought  to  be  heavily  taxed.  Both 
the  Indianapolis  plan  and  the  Fowler  bill  embody  this  conception. 
The  soundest  bank  that  the  country  had  before  the  Civil  War  was 
the  State  Bank  of  Indiana ;  yet  this  bank  was  allowed  to  issue  notes 
to  double  the  amount  of  its  capital,  and  it  did  so,  and  it  never  failed 
to  redeem  them,  even  in  the  panic  of  1857. 

This  is  not  difficult  to  understand.  The  State  Bank  of  Indiana 
kept  the  right  proportion  of  reserve  to  liabilities,  and  when  a  bank 
does  so  it  is  immaterial  whether  its  liabilities  are  for  notes,  or  for 
deposits,  or  for  a  combination  of  the  two.  The  State  Bank  of 
Indiana  existed  in  a  sparsely  settled  agricultural  country  where 
deposit  banking  was  of  little  use.  Nearly  all  the  persons  whose 
paper  was  discounted  wanted  notes.  If  the  bank  had  been  hampered 
by  a  provision  that  it  should  not  issue  notes  in  excess  of  its  paid 
capital,  and  not  more  than  80  per  cent,  thereof  without  paying  a 
tax  of  5  per  cent,  on  the  excess,  it  could  not  have  existed  at  all. 
Suppose  that  our  national  banks  were  prohibited  from  having 
deposit  liabilities  in  excess  of  their  paid  capital,  and  were  required 
to  pay  a  tax  of  5  per  cent,  on  all  such  liabilities  above  80  per  cent, 
thereof,  what  would  be  the  result  ?     According  to  the  last  report  of 


BANKING  REFORM  AND  CURRENCY  SECTION  299 

the  Comptroller  of  the  Currency,  the  capital  of  the  National  banks 
was  $655,000,000.  Under  the  supposed  rule  their  deposits  could  not 
exceed  that  amount  in  any  event,  and  they  could  not  exceed  $524,- 
000,000  without  paying  an  excessive  tax  on  the  overplus.  Yet  their 
actual  deposit  liabilities  were  within  a  small  fraction  of  $3,000,- 
000,000  at  that  time,  and  their  loans  and  discounts  were  an  equal 
sum.  How  many  of  these  banks  could  exist  if  they  were  restricted 
by  such  a  rule  regarding  deposits  ?  And  how  could  the  business  of 
the  country  be  carried  on? 

Yet,  as  regards  the  safety  of  a  bank,  there  is  no  difference  what- 
ever between  a  note  liability  and  a  deposit  liability.  The  former  is 
a  check  drawn  by  the  bank's  president  against  his  reserve  fund,  the 
latter  is  the  check  of  the  depositor,  or  his  right  to  draw  it,  against 
the  same  reserve  fund.  Of  a  given  amount  of  liabilities  composed 
partly  of  notes  and  partly  of  checks,  the  notes  will  stay  out  longer 
than  the  checks  and  give  the  banker  less  trouble.  Only  about  one- 
fourth  of  the  national  bank  notes  now  existing  are  presented  for 
redemption  each  year. 

I  might  instance  the  Suffolk  bank  system  that  prevailed  in 
New  England  before  the  Civil  War.  This  was  as  distinct  an  evolu- 
tion and  as  marked  an  example  of  "survival  of  the  fittest"  as  can  be 
found  in  this  world's  affairs.  I  never  read  its  history  without 
admiration,  and  while  I  agree  that  the  national  banking  system  was 
necessary  and  was  a  great  blessing  for  the  whole  country,  and  that 
the  Suffolk  system  had  to  give  way  to  it,  I  regret  the  necessity  that 
put  an  end  to  so  useful  an  institution. 

Under  the  law  of  Massachusetts  any  bank  might  incur  debts  to 
the  amount  of  twice  its  capital  stock,  not  counting  as  debts  its 
deposits,  or  its  dues  to  other  banks.  Therefore  the  banks  might 
legally  issue  circulating  notes  to  double  the  amount  of  their  capital, 
but  practically  they  could  not  do  so.  Their  note  circulation  was 
seldom  more  than  40  per  cent,  of  their  paid  capital.  The  public 
would  not  take  any  more.  Tt  is  the  public  demand,  not  the  inclina- 
tion of  the  banker,  that  determines  how  many  notes  shall  be  in  cir- 
culation;  and  this  public  demand  ought  always  to  be  satisfied  by 
banks  paying  out  their  own  notes  over  their  own  counters  in 
exchange  for  good  bills  receivable.  The  law  of  Massachusetts  pro- 
hibited banks  from  paying  out  any  notes  but  their  own,  and  that 


3oo  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

was  a  wise  provision,  since  it  compelled  the  banks  to  send  to  the 
Suffolk  for  redemption  the  notes  of  other  banks  that  it  received  in 
the  course  of  business.  All  the  banks  were  thus  lequired  to  keep  a 
sufficient  reserve  in  order  to  redeem  their  notes  at  the  Suffolk.  The 
New  England  note  circulation  was  redeemed  ten  times  each  year 
on  the  average,  yet  the  cash  reserve  needed  was  only  15  per  cent,  of 
both  circulation  and  deposits,  and  country  banks  were  allowed  to 
keep  all  of  this  reserve  in  Boston  banks.  These  country  banks 
received  as  deposits  in  the  course  of  business  as  much  specie  as  was 
ever  called  for  by  their  customers,  and  they  had  plenty  of  currency  to 
meet  all  demands,  since  they  made  it  themselves,  as  the  Canadian 
banks  do  now.  Yet  the  losses  to  noteholders  from  failures  among 
the  500  banks  embraced  in  the  Suffolk  system  in  twenty  years 
(1840-1860)  were  only  $877,327.  A  tax  of  one-eighth  of  one  per 
cent,  per  annum  on  the  circulation  outstanding  would  have  pro- 
tected noteholders  against  this  loss. 

The  point  of  all  this  is  that  there  is  no  necessary  or  logical  rela- 
tion between  a  bank's  capital  and  its  circulation,  any  more  than 
there  is  between  its  capital  and  its  deposits.  Both  are  liabilities, 
and  the  same  percentage  of  reserve  that  will  protect  one  will  pro- 
tect both.  Why  is  it,  then,  that  all  of  our  banking  laws  and  projects 
of  law  restrict  the  note  issues  of  banks  to  a  certain  proportion  of 
their  capital,  while  they  allow  deposits  to  multiply  to  any  extent? 
Why  is  it  that  bankers  themselves  see  no  danger  in  the  unlimited 
increase  of  deposits,  but  look  with  great  favor  thereon ;  yet  think 
that  note  issues  should  be  restricted  to  the  paid-up  capital  of  the 
issuing  bank,  even  where  they  are  secured  by  bonds  in  the  treasury  ? 
This  queer  notion  is  an  inheritance  from  the  days  of  heterogeneous 
state  bank  notes,  when  banking  was  in  great  disorder,  and  when 
failures  were  frequent  and  disastrous.  Banks  were  known  to  the 
public  only  as  note-issuing  institutions.  Examine  the  statute  books 
of  that  period  and  you  will  find  that  the  phrase  "banking  privileges" 
meant  solely  the  right  to  issue  circulating  notes.  The  words  had 
no  other  acceptation.  The  suffering  caused  by  broken  banks  was, 
therefore,  attributed  entirely  to  note  issues.  It  sank  into  the  public 
mind.  It  created  the  conviction  that  the  banks  failed  because  they 
had  insufficient  capital,  which  was  true  in  most  cases;  but  it  did  not 
follow  that  the  notes  had  caused  the  failures.     On  the  contrary,  the 


BANKING  REFORM  AND  CURRENCY  SECTION  301 

notes,  as  long  as  they  were  out,  brought  strength,  not  weakness,  to 
the  banks;  and  if  the  latter  had  been  managed  rightly  in  other 
respects,  and  had  kept  the  proper  cash  reserve,  as  the  State  Bank  of 
Indiana  did,  they  would  have  weathered  all  gales,  as  that  famous 
institution  did,  and  as  the  great  majority  of  the  Suffolk  banks  did. 
We  have  inherited  the  beliefs  of  those  ante-bellum  days.  We  have 
accepted  without  question  or  examination  the  doctrine  that  the  note 
liabilities  of  a  bank  should  be  restricted  to  the  amount  of  its  paid 
capital,  or  to  some  proportion  less  than  its  capital.  If  this  is  a  sound 
doctrine,  then  it  is  logical  to  say  that  all  note  issues  above  60  or  80 
per  cent,  of  capital  should  be  termed  "emergency  circulation"  and 
be  heavily  taxed.  If  it  is  not  sound,  then  the  proposed  tax  is  unphil- 
osophical  and  is  really  an  obstacle  to  the  relief  sought  for  by  such 
circulation. 

But  it  is  said  that  Germany  issues  emergency  circulation  in  times 
of  great  stringency,  and  puts  a  tax  of  5  per  cent,  on  it,  and  does  so 
with  advantage  to  the  business  community  and  to  the  imperial  treas- 
ury. Quite  true,  but  the  German  bank  act  measures  note -issues 
by  the  bank's  cash  reserve,  not  by  its  capital.  It  says  that  the 
Reichsbank  may  issue  notes  to  the  amount  of  450,000,000  marks, 
regardless  of  its  cash  reserve.  Then  it  may  issue  additional  notes 
equal  to  its  cash  reserve.  Up  to  this  point  the  German  system  runs 
parallel  with  the  Bank  of  England  system,  but  here  they  diverge. 
The  German  law  allows  further  issues,  but  not  to  an  unlimited 
amount.  The  bank  must  always  keep  a  cash  reserve  equal  to  33  1-3 
per  cent,  of  its  outstanding  notes;  and  upon  this  last  batch,  or  over- 
plus, of  notes  it  must  pay  to  the  imperial  treasury  a  tax  at  the  rate 
of  5  per  cent,  per  annum.  Thus  the  danger  line  is  drawn,  not  at 
the  capital  of  the  bank,  but  at  its  cash  reserve,  which  is  the  true 
criterion  both  for  note  liabilities  and  for  deposits.  It  is  the  true 
criterion  because  the  bank's  capital  may  be  locked  up  in  investments 
which  cannot  be  realized  on  immediately,  whereas  the  reserve  con- 
sists of  the  very  thing  wanted  to  meet  liabilities. 

Before  closing,  I  wish  to  speak  of  one  feature  of  the  Indianapolis 
plan  of  asset  currency  which  has  not  attracted  the  attention  that  it 
deserves.  It  provides  that  the  government  shall  hold  a  5  per  cent, 
redemption  fund  for  all  bank  notes  as  now ;  also  a  5  per  cent,  guar- 
antee fund,  with  the  power  to  replenish  it  by  taxation  when  needful ; 


,^- 


PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 


also  a  paramount  lien  on  the  assets  of  failed  banks  and  on  the  share- 
holders' liability,  for  the  redemption  of  the  notes  of  such  banks. 
Having  supplied  the  government  in  this  way  with  the  means  for 
redemption  of  bank  notes,  it  provides  that  the  treasury  shall  receive 
at  par  all  such  notes  in  payment  to  itself  except  for  duties  on 
imports,  and  that  it  shall  not  pay  them  to  its  own  creditors  without 
their  consent.  Under  this  plan,  therefore,  the  noteholder  can  lose 
nothing,  because  he  can  use  the  notes  in  payments  to  the  govern- 
ment ;  and  the  government  cannot  lose,  because  it  is  armed  with  the 
power  to  recoup  itself.  It  is  said  by  some  that  if  the  government 
is  to  be  responsible  for  a  note  circulation  it  will  issue  such  circulation 
itself,  instead  of  intrusting  that  function  to  banks.  That  is  one  of 
the  things  that  remain  to  be  seen.  I  suppose  that  the  government 
will  insist  upon  whatever  the  people  insist  upon.  It  is  all  a  matter 
of  popular  education. 


EMERGENCY  CIRCULATION 

ADDRESS  DELIVERED  BY  CORNELIUS  A.  PUGSLEY,  PRESIDENT  OF  THE  WESTCHESTER 
COUNTY  NATIONAL  BANK,  PEEKSKILL,  N.  Y.,  BEFORE  THE  AMERICAN  BANKERS' 
ASSOCIATION,    AT    NEW    ORLEANS,    NOVEMBER,    IQ02. 

Much  criticism  has  been  made  of  the  currency  system  of  this 
country;  but  whatever  there  is  of  criticism,  our  currency  is  sound 
beyond  question  and  good  beyond  peradventure.  The  great  essen- 
tial in  any  currency  is  quality  rather  than  quantity.  It  is  the  ex- 
ponent of  value  in  trade  and  exchanges,  and  if  it  fully  meets  these 
demands,  the  desirability  of  an  abundance  of  money  ceases.  One 
does  not  need  three  horses  to  draw  the  plow  when  one  will  do ;  and 
the  smallest  amount  of  money  which  will  transact  the  largest  amount 
of  business  is  a  very  near  approach  to  the  ideal  in  business  connec- 
tions. 

The  greatest  objection  to  our  currency  is  that  it  does  not  pos- 
sess flexibility.  Its  only  elasticity  is  afforded  by  our  mines  and  the 
gold  settlements  of  the  trade  balances  for  and  against  us.  The 
present  law  regulating  circulation,  whose  purpose  was  not  to  prevent 
a  too  sudden  contraction  of  the  currency,  but  to  prevent  the  govern- 


BANKING  REFORM  AND  CURRENCY  SECTION  303 

ment  bonds  held  to  secure  circulation  from  coming  upon  the  market, 
prohibits  the  retirement  of  more  than  $3,000,000  per  month.  It 
has  been  suggested  by  prominent  bankers  that  this  law  should  be 
repealed,  and  that  banks  should  be  allowed  to  retire  their  circulation 
if  they  chose  to  do  so.  Although  this  might  add  flexibility  to  our 
currency  system,  yet  I  am  not  sure  that  such  action  would  be  de- 
sirable, as  it  would  undoubtedly  result  in  a  very  considerable  con- 
traction of  the  currency  in  order  to  reap  the  profits  to  be  derived 
from  the  high  prices  of  government  bonds.  Possibly,  if  inducement 
in  the  way  of  a  reduced  taxation  should  be  made  by  the  government 
to  the  banks  to  retain  their  bonds  after  they  had  retired  their  circula- 
tion, in  order  that  they  might  have  them  on  hand  to  reissue  circula- 
tion upon  as  occasion  might  require,  it  might  add  elasticity  to  the 
currency. 

The  national  banks  of  this  country  are  compelled  to  hold  as  a 
reserve,  gold  and  silver  and  United  States  notes,  and  yet  I  see  no 
reason  why  a  national-bank  note,  which  is  admittedly  more  effectually 
secured  than  a  greenback  or  a  United  States  bond,  should  not  be 
counted  as  a  reserve,  because  I  consider  it  as  good  for  that  purpose, 
or  any  other  purpose,  as  any  obligation  in  this  country  to-day.  As 
a  well-known  banker  has  said :  "It  has  first  an  obligation  of  the 
bank  to  pay ;  second,  it  is  secured  by  government  bonds ;  and  third, 
the  government  is  pledged  by  law  to  redeem  it  upon  presentation, 
having  in  turn  a  prior  lien  upon  the  assets  of  the  bank  for  reimburse- 
ment." In  Germany  I  understand  that  notes  of  specie-paying  banks 
are  so  counted  as  a  reserve. 

During  the  panic  of  1893  it  was  necessary  to  resort  to  the  issu- 
ing of  clearing-house  certificates,  and  that  they  rendered  the  public 
untold  service  is  unquestioned.  The  amount  of  clearing-house  cer- 
tificates issued  by  all  the  clearing-houses  of  the  country  amounted 
in  the  aggregate  to  about  $66,000,000.  These  certificates  were 
issued  merely  in  the  great  commercial  cities,  and  were  available  only 
between  banks  in  settling  debit  balances  at  the  clearing-houses. 
These  certificates  were  the  means  of  affording  only  indirect  relief, 
as  they  were  not  negotiable  in  the  hands  of  individuals.  Tf  a  great 
panic  should  again  befall  (he  country,  I  am  somewhat  in  doubt 
whether  these  clearing-house  certificates  might  prove  as  desirable 
under  our  changed  conditions  as  in  the  past.     It  has  been  stated 


304  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

by  eminent  authority  that  these  certificates,  if  again  issued,  might 
impair  our  national  prestige  as  a  money  power  in  the  world  of 
finance  and  depreciate  our  securities  as  a  nation. 

This  being  the  case,  it  behooves  the  bankers  of  this  country, 
and  the  legislative  bodies,  to  prepare  such  an  emergency  currency 
as  will  take  the  place  of  clearing-house  certificates  and  relieve  the 
distress  which  not  only  attends  a  great  panic,  but  results  from  a 
demand  for  additional  circulation  in  the  moving  of  the  crops  and 
the  undue  contraction  of  the  currency  resulting  from  the  accumula- 
tions from  customs  deposited  in  the  United  States  Treasury,  which 
occur  almost  periodically  each  year. 

Various  plans  have  been  evolved  for  the  reform  of  the  monetary 
system,  and  a  number  of  bills  have  been  introduced  in  Congress 
during  recent  years,  for  the  purpose  of  giving  greater  elasticity  to 
the  currency.  Among  the  former  are  the  famous  "Baltimore  plan," 
the  plans  of  Secretaries  Carlisle  and  Gage,  and  of  the  Indianapolis 
Monetary  Convention.  Of  the  bills  that  have  attained  prominence 
are  Congressman  Walker's,  the  Lovering,  and  Mr.  Fowler's. 

As  a  member  of  the  Banking  and  Currency  Committee  of  the 
House  of  Representatives,  I  want  to  say  that  Mr.  Fowler  is  worthy 
of  high  commendation  for  the  thought  and  laborious  work  which  he 
has  given  to  these  questions.  He  has  rendered  a  service  by  bring- 
ing these  great  problems  to  the  attention  not  only  of  the  bankers, 
but  of  the  people  of  the  entire  country.  Another  bill,1  which  has 
been  highly  commended  in  certain  sections,  which  provided  for  the 
incorporation  of  clearing-houses  to  issue  an  emergency  currency, 
prepared  by  Mr.  Gilman  and  introduced  by  me  at  the  last  session, 
had  the  same  purpose  in  view.  Also  a  bill  prepared  by  Hon.  Willis 
S.  Paine,  ex-Superintendent  of  Banks  of  the  State  of  New  York, 
which  provided  for  the  issuing  of  currency  by  state  banks. 

I  do  not  believe  the  American  people  are  yet  ready  for  an  asset 
currency  pure  and  simple,  or  for  such  a  radical  departure  in  our 
currency  system  as  is  provided  for  in  the  Fowler  bill.  Mr.  Fowler 
in  his  addresses  refers  to  the  effect  or  results  of  branch  banks.  He 
states  how  money  would  flow  out  from  the  great  banks  as  needed; 
but  he  fails  to  state  how  money  would  flow  in  from  the  smaller  in- 
stitutions to  the  great  centers,  and  how  the  branches  of  the  banks 

1  See  House  Bill  No.  7950,  57th  Congress. 


BANKING  REFORM  AND  CURRENCY  SECTION 


305 


of  the  great  cities  would  eliminate  the  local  institutions  throughout 
the  country.  These  great  banks  would  be  able  to  plant  their 
branches  in  every  city  or  town  where  they  pleased,  and  without 
capital  or  taxation  would  soon  drive  the  local  institutions  out  of 
business.  After  this  has  been  accomplished,  the  poor  borrowing 
public,  for  whom  Mr.  Fowler  expresses  such  concern,  would  pay  the 
rate  as  well  as  the  freight  that  large  institutions  would  see  fit  to 
demand.  We  do  not  want  a  great  money  power  that  might  become 
a  vast  political  power  in  this  mighty  republic.  From  such  a  pos- 
sibility the  American  people,  every  patriot,  every  lover  of  his  country, 
may  well  pray  to  be  delivered. 

I  believe,  however,  that  an  emergency  currency,  ingrafted  upon 
our  present  system,  might  prove  beneficial,  and  would  also  test  the 
working  of  an  asset  currency,  to  which  we  may  have  to  come  when 
the  government  bonds  are  no  longer  available  as  security.  Such  an 
emergency  circulation,  I  believe,  might  be  had  if  the  present  law 
should  be  amended  so  as  to  permit  all  national  banks  holding 
government  bonds  as  security  for  circulation  to  issue  10  per  cent, 
additional  currency  on  the  amount  of  bonds  deposited  with  the 
Secretary  of  the  Treasury,  the  same  to  be  taxed  at  the  rate  of  5  per 
cent,  per  annum  ;  and  also  providing  that  all  banks  having  a  surplus 
fund  equal  to  20  per  cent,  of  their  capital  should  be  authorized  to 
issue  10  per  cent,  of  asset  currency,  to  be  secured  by  approved  bonds 
or  by  bills  receivable  specifically  set  apart  for  that  purpose,  as  in  the 
Bank  of  France.  As  the  present  law  provides  that  all  circulation 
issued  by  the  government  to  the  banks  is  a  first  lien  upon  assets, 
there  would  be  no  necessity  for  change  of  the  law  in  that  respect. 
This  10  per  cent,  of  asset  currency  should  be  taxed  at  not  less  than 
6  per  cent,  per  annum,  and  the  bonds  and  bills  receivable  set  apart 
to  secure  the  same  should  be  in  excess  of  the  circulation  by  at  least 
50  per  cent.  The  bills  receivable  should  have  one  or  more  in- 
dorsers  known  to  be  responsible  and  guaranteed  by  the  personal 
bond  of  the  directors  that  the  same  are  set  aside  as  security  for 
circulation.  The  setting-aside  of  the  bonds  should  also  be  guaran- 
teed in  a  similar  manner,  with  the  infliction  of  a  penalty  if  the 
security  is  not  set  aside  as  guaranteed. 

These  emergency  circulation  notes  should  not  be  printed  in  any 
distinguishing  color  or  design,  but  it  should  be  within  the  power 
20 


306  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

of  the  Secretary  of  the  Treasury  and  the  Comptroller  of  the  Cur- 
rency to  have  in  hand  and  to  issue  such  emergency  currency,  not 
to  exceed  20  per  cent,  of  the  hank's  capital  when  in  their  judgment 
it  should  be  advisable  or  necessary,  and  also  to  call  for  payment  of 
this  circulation  from  banks,  when  it  should  be  desirable  that  the 
same  should  be  retired,  thus  avoiding  inflation  of  the  currency, 
which,  in  my  opinion,  might  prove  more  dangerous  than  a  lack  of 
currency  at  certain  seasons  of  the  year.  The  great  requisite  should 
be  the  quality  rather  than  the  quantity.  Mr.  Dawes,  a  former  Comp- 
troller of  the  Currency,  has  very  aptly  said,  "We  do  not  want  an 
asset  currency  that  will  help  us  into  a  panic  when  we  are  out  of  one, 
but  an  emergency  currency  that  will  help  us  out  of  a  panic  when  we 
are  in  one."  And  better  still,  and  what  is  needed  and  required,  is  an 
emergency  circulation  so  perfect  in  its  security  and  availability 
that  it  will  unquestionably  prevent  the  panic. 

If  such  an  amendment  to  our  monetary  system  should  be  pro- 
vided, it  would  result  in  sufficient  currency,  in  my  opinion,  to  tide 
over  any  conditions  of  panic  or  stringency  in  our  circulating 
medium.  It  will  be  remembered  that  in  the  panic  of  1893  about 
$66,000,000  of  clearing-house  certificates  were  issued.  Under  the 
provision  that  10  per  cent,  should  be  issued  by  banks  having  gov- 
ernment bonds  on  deposit,  there  being  about  $365,000,000  of  gov- 
ernment bonds  held  as  security  for  circulation,  an  amount  aggregat- 
ing about  $36,000,000  would  be  afforded ;  and  under  the  provision 
that  banks  having  20  per  cent,  of  surplus  should  be  allowed  to 
issue  asset  or  emergency  currency  to  the  amount  of  10  per  cent.  I 
should  consider  that  $60,000,000  more  would  be  available,  without 
having  examined  carefully  into  the  number  of  banks  that  could 
avail  themselves  of  this  provision.  The  provision  that  national 
banks  should  issue  such  currency  would  undoubtedly  lead  all  banks 
to  strengthen  themselves,  in  order  that  they  might  avail  themselves 
of  the  act. 

The  provision  might  also  be  made  that  this  currency  should  not 
remain  in  circulation  for  a  longer  period  than  six  months.  But 
this  might  safely  be  left  to  the  Secretary  of  the  Treasury  and  the 
Comptroller  of  the  Currency,  the  retirement  of  the  notes  being 
effected,  as  at  present,  through  the  redemption  fund,  and  without 
disturbing  the  bonds  on  deposit.     The  security  of  10  per  cent,  of 


BANKING  REFORM  AND  CURRENCY  SECTION  307 

the  currency  issued  would  be  unquestioned  by  the  market  value 
of  government  bonds  at  the  present  prices  and,  with  the  interest 
charged  upon  this  10  per  cent,  of  currency,  as  well  as  upon  the  10 
per  cent,  issued  by  banks  with  20  per  cent,  of  surplus  or  more, 
would  soon  provide  a  fund  amply  sufficient  to  pay  any  possible  loss 
that  might  be  incurred  by  the  government.  The  same  provision  as 
now  in  regard  to  the  deposit  of  5  per  cent,  with  the  Comptroller 
of  the  Currency  should  also  apply  to  the  circulation  issued  under 
this  provision,  and  I  am  not  sure  but  that  at  least  the  same  per- 
centage of  legal-tender  money  should  be  held  against  this  circula- 
tion in  banks  as  is  now  provided  for  bank  deposits. 

A  sound,  stable,  and  responsive  currency  is  one  of  the  greatest 
bulwarks  of  national  glory,  greatness,  and  power,  and  one  which 
will  prove  of  inestimable  value  to  its  business  interests. 


THE  MONEY  SUPPLY   OF  THE  UNITED  STATES 

LETTER  ADDRESSED  BY  JAMES  B.  FORGAN,   PRESIDENT  OF  THE  FIRST   NATIONAL  BANK 
OF    CHICAGO,    TO   THE   TEXAS    BANKERS'    ASSOCIATION,    APRIL    28,    I903. 

"The  money  supply  of  the  United  States — is  it  sufficient  for  our 
commerce?  And  suggestions  as  to  a  practical  plan  to  increase 
its  elasticity." 

From  an  experience  of  twenty  years,  my  answer  to  the  question 
propounded  is  that  the  supply  of  money  periodically  oscillates  be- 
tween overabundance  and  inadequacy,  in  accordance  with  the 
demand  for  it,  which  varies  with  the  seasons.  The  supply,  being 
arbitrarily  fixed  in  quantity,  bears  no  relation  to  the  varying  de- 
mands of  commerce,  and  there  is  not  even  an  attempt  in  our  mone- 
tary system  to  adjust  the  supply  to  the  demand. 

In  the  long  run,  commerce  suffers  more  from  the  periods  of 
overabundance  than  from  those  of  scarcity.  The  origin  of  each 
recurring  period  of  tight  money  can  be  traced  to  preceding  periods 
of  easy  money.  Whenever  money  becomes  so  overabundant  that 
bankers,  in  order  to  keep  it  earning  something,  have  to  force  it 
out  at  abnormally  low  rates  of  interest,  the  foundations  are  laid 
for  a  period  of  stringency  in  the  not  far  distant  future;    for  then 


308    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

speculation  is  encouraged,  prices  are  inflated,  and  all  sorts  of 
securities  are  floated  until  the  money  market  is  glutted  with  them. 
Our  monetary  system  is  not  the  sole  cause  of  these  alternating 
fluctuations,  but  it  lends  itself  to  them  and  is  auxiliary  to  other 
causes.  Our  national  banking  system  and  the  government  treasury 
system  also  aid  and  abet  them,  and  the  three  together  are  responsible 
for  them.  If  these  three  systems,  so  closely  allied,  were  all  adapted 
and  adjusted  to  the  needs  of  commerce,  as  they  should  be,  their 
relation  to  commerce  would  be  to  develop  it  on  a  sound  basis  by 
establishing  steady  markets.  Their  influence  would  be  to  prevent 
rather  than  to  cause  such  oscillations  as  now  take  place  between 
easy  and  tight  money,  speculation  and  stagnation,  inflation  and 
depression.  At  present,  however,  my  remarks  are  to  be  confined 
to  the  monetary  system. 

For  some  years  it  has  been  apparent,  both  from  statistics  and 
from  financial  conditions,  that  the  circulating  medium  of  the  country 
has  not  increased  in  proportionate  ratio  to  the  expansion  of  bank 
capital  and  deposits,  the  development  of  commerce,  and  the  increase 
of  population.  Notwithstanding  the  efforts  of  the  Secretary  of 
the  Treasury  to  keep  the  different  kinds  of  government  money 
circulating  and  to  encourage  national  banks  to  increase  their  cir- 
culation, it  is  evident  that  the  supply  has  become  inadequate  to  the 
requirements  of  commerce  during  the  season  when  the  maximum 
amount  of  it  is  wanted. 

To  add  to  the  money  now  in  circulation  more  of  the  same  kind, 
until  the  supply  shall  equal  the  maximum  requirements  of  com- 
merce, without  providing  means  for  its  contraction  when  these 
requirements  are  at  their  minimum,  would  only  perpetuate  the 
evils  of  our  present  system.  What  we  require  is  a  more  elastic 
currency. 

Before  making  any  suggestions  as  to  how  its  elasticity  may  be 
increased,  pardon  me  if  I  go  into  an  elementary  discussion  of  the 
real  meaning.  Elasticity,  in  the  currency  as  in  anything  else,  means 
of  the  subject  that  in  some  quarters  an  erroneous  idea  of  the 
meaning  of  elasticity  exists.  The  popularly  accepted  meaning  of 
the  word  seems  to  be  expansion.  This  is  precisely  the  reverse  of  its 
real  meaning  of  "elasticity."  I  have  gathered  from  the  discussion 
contraction.     To  illustrate:    If  I  take  a  piece  of  soft  gum  in  my 


BANKING  REFORM  AND  CURRENCY  SECTION 


309 


hands  and  pull  it  out,  it  will  expand  to  the  limit  of  its  capacity,  and 
when  released  will  remain  expanded.  Gum  is  not  elastic.  If,  how- 
ever, I  take  a  rubber  band  in  a  similar  way  and  expand  it,  when  I 
let  go  it  will  contract.  It  is  elastic.  Elasticity  is  that  quality 
in  a  substance  which  enables  it  to  contract  when  outside  pressure 
on  it  has  been  removed.  This  is  precisely  what  elasticity  in  the 
currency  is.  It  is  the  contraction  in  the  amount  of  it  which  takes 
place  when  the  demands  of  commerce  for  it  decrease.  These  de- 
mands increase  and  diminish,  are  strong  and  weak,  in  accordance 
with  the  natural  and  seasonable  fluctuations  of  business.  The  lack 
of  elasticity  in  our  currency  is  that  when  once  issued  it  remains 
expanded  like  the  gum,  and  does  not  of  its  own  accord  contract  like 
the  rubber  band.  The  amount  of  it  in  existence  is  no  less  when 
the  demands  of  commerce  are  at  their  lowest  than  it  is  when  they 
are  at  their  highest,  and  vice  versa.  I  know  of  only  one  way  by 
which  this  elasticity,  this  ability  to  contract,  can  be  given  to  it;  that 
is  by  the  daily  withdrawal,  through  the  actual  redemption  and 
practical  cancellation,  of  all  bank  notes  which  are  not  kept  in  cir- 
culation by  the  requirements  of  commerce.  When  the  Bank  of 
England  redeems  its  notes,  it  cancels,  destroys,  and  does  not  re- 
issue them.  Other  banks  issuing  credit  currency,  such  as  the 
Scotch  and  Canadian  banks,  when  they  redeem  their  notes,  cancel 
them  so  far  as  their  existence  as  any  part  of  the  money  of  the 
country  is  concerned,  but  do  not  destroy  them.  They  are  written 
off  their  books  and  are  laid  aside  for  the  purpose  of  being  reissued 
when  opportunity  occurs.  They  are,  however,  so  far  as  their  con- 
nection with  the  circulating  medium  of  the  country  is  concerned, 
as  utterly  out  of  existence  as  if  they  did  not  exist  at  all,  and  remain 
so  until  they  are  again  issued.  Under  our  system  the  currency 
which  each  bank  receives  from  the  Comptroller  immediately  be- 
comes a  part  of  the  fixed  circulating  medium  of  the  country,  and 
counts  as  so  much  money.  The  banks  that  nominally  issue  it  have 
a  right  so  to  count  it,  for  they  paid  out  actual  money  for  it  when 
they  bought  the  government  bonds  to  secure  it;  hence,  our  national- 
brink  notes,  instead  of  being  dealt  with  as  mere  promises  to  pay 
money,  are  kepi  afloat  in  the  channels  of  commerce,  and  arc  handled 
by  the  banks  the  same  as  gold  or  government  notes,  and  no  active 
redemption  of  them  is  deemed  necessary.     The  result  is  that,  when 


3io    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

the  maximum  demand  for  currency  occurs,   so  much  of  it  is  re- 
quired that  the  banks  with  difficulty  maintain  their  legal  reserves; 
but  when  the  demand  is  at  its  minimum,  the  currency  accumulates 
in   their   vaults  and  they   resort  to   forced   loans,    inflated   credits, 
cheap  rates,  and  other  artificial  methods,  to  keep  it  employed  and 
earning  something.     Our  present  specially  secured  bank  currency 
has  no  elasticity  and  can  have  none.     When  bank  currency  is  not 
so  secured,  it  floats  in  the  channels  of  commerce  on  exactly  the  same 
basis  as  checks,  bank  drafts,  and  other  similar  obligations  and  is 
daily  presented  along  with  these  through  the  clearing-houses  for 
redemption.     Banks  are  not  likely  to  pile  up  in  their  vaults  the  non- 
interest-bearing  unsecured  notes  of  their  competitors,  any  more  than 
they  will  hold  over  their  checks  or  demand  obligations  of  similar 
kinds.     The    competition   among  the   banks   to   put   out   their   own 
notes  is  the  prime  factor  in  effecting  the  daily  redemption  which 
alone  affords  elasticity  in  the  currency.     The  effect  of  such  daily 
redemption  is  to  keep  the  volume  of  the  currency  in  circulation  in 
exact  proportion  to  the  demands  of  commerce,  because  such  of  it  as 
is  not  required,  instead  of  accumulating  in  the  banks  and  continuing 
to  count  as  money,   is   redeemed  and  to  all  intents  and  purposes 
canceled.     Whatever  amount  of  its  own  notes  each  bank  has  on 
hand  unissued  counts  for  nothing,  as  they  only  become  a  part  of  the 
money  of  the  country  when  they  have  been  paid  out.     During  the 
season  when  the  requirements  of  commerce  are  light,  each  bank  will 
have  on  hand  a  supply  of  its  own  circulating  notes,  counting  for 
nothing,   as   stated,   but   in   reality   an   additional   reserve    strength 
against  the  demands  of  the  next  active  season.     The  system  prac- 
tically gives  to  the  banks  the  right  to  create  and  furnish  circulation 
just  when  it  is  wanted,  and  promptly  retires  it  as  soon  as  it  is  no 
longer  wanted. 

If  I  have  correctly  diagnosed  the  trouble  with  our  money  supply, 
it  follows  that  we  need  relief.  Where  shall  we  look  for  it?  There 
can  be  no  doubt  that  the  addition  of  an  elastic  currency  to  our 
present  inelastic  supply  would  afford  relief,  and  in  a  large  measure 
correct  existing  evils.  Any  legislation  on  the  subject  must  be  of  an 
experimental  nature,  and  should  therefore  be  guarded  by  a  law 
carefully  thought  out  in  every  detail.  To  establish  a  system  under 
which  five  or  six  thousand  banks,  scattered  all  over  this  vast  conn- 


BANKING  REFORM  AND  CURRENCY  SECTION  311 

try,  will  issue  their  individual  circulating  notes  and  have  them 
circulate  everywhere  at  par  is  no  small  undertaking.  The  students 
of  finance  may  supply  the  principles ;  but  practical  bankers  must 
work  out  the  details.  The  law  should  be  as  nearly  perfect,  both  in 
principle  and  detail,  as  possible,  for  on  the  practical  working  of 
the  details  will  depend  the  effectiveness  of  the  system.  It  will  not 
do  for  the  students  of  finance  to  brush  aside  practical  suggestions, 
as  they  too  frequently  do,  with  the  remark :  "Oh !  that  is  a  mere 
matter  of  detail."  It  will  be  found  that  the  ultimate  success  of  the 
system  will  depend  upon  its  details  being  properly  worked  out  and 
embodied  in  the  law  before  any  currency  is  issued  under  it.  I  believe 
that  the  privilege  of  issuing  a  limited  amount  of  assets  currency  may 
be  safely  granted  to  national  banks  under  proper  regulations. 

Mr.  Fowler's  bill1  now  before  Congress  is  based  on  correct 
principles,  but  is  deficient  in  its  details.  What  it  needs  is  to  have 
a  committee  of  bankers  elaborate  out  of  it  the  details  of  a  practical 
plan.  Without  assuming  to  take  the  position  of  such  a  committee, 
I  will  now  suggest  a  few  of  what  appear  to  me  to  be  improvements 
in  the  details  of  the  Fowler  bill.  The  bill  is  not  intended  to  inter- 
fere with  the  present  circulation  of  the  national  banks.  It  proposes, 
however,  to  permit  them  to  take  out  and  issue  assets  currency  to  an 
amount  not  exceeding  25  per  cent,  of  their  paid-up  capital,  without 
providing  for  their  keeping  out  their  secured  circulation  in  its 
present  volume.  It  seems  to  me  the  effect  of  this  would  be  that  the 
new  bank  currency,  being  more  profitable,  would  soon  displace 
the  old.  Many  national  banks  have  already  drawn  their  circulation 
down  to  the  minimum  required  by  law,  seeing  more  profit  in  selling 
the  bonds  at  the  premium  they  have  commanded  than  in  continuing 
circulation  against  them.  A  provision  in  the  bill  requiring  that 
every  bank  taking  out  assets  currency  must  keep  out  an  equal 
amount  of  currency  secured  by  government  bonds  would  not  only 
prevent  the  withdrawal  of  the  old  for  the  purpose  of  substituting 
the  new,  but  in  all  probability  would  increase  the  volume  of  the 
secured  circulation. 

The  bill  proposes  to  divide  the  country  into  three  redemption 
districts,  with  New  York,  Chicago,  and  San  Francisco  as  respect- 
ively  the    redemption    centers    of   each    district.     Section   9   of   the 

1  See  House  Bill  No.  16228,  2nd  session  57th  Congress. 


312     PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

bill  requires  each  bank  "to  redeem  its  notes  on  demand  in  gold  coin 
over  its  own  counter,  and  if  it  is  located  outside  the  redemption 
cities  it  must  select  a  national  bank  in  a  redemption  city  which  shall 
redeem  its  notes  in  gold  coin."  The  notes  when  issued  are  to  be 
"received  upon  deposit,  and,  for  all  purposes  of  debt  and  liability, 
by  every  national  bank  at  par,  and  without  any  charge  of  whatso- 
ever kind."  The  object  is  to  have  all  the  notes  of  all  the  banks 
circulate  everywhere  in  the  country  at  par.  An  arbitrary  law  com- 
pelling every  national  bank  to  receive  the  bills  of  all  other  banks 
at  par  would,  of  course,  accomplish  the  end  in  view,  but  at  the  ex- 
pense of  justice  and  equity,  for  it  would  arbitrarily  submit  each 
bank  to  the  trouble  and  expense  of  forwarding  to  the  point  of 
redemption  the  bills  of  all  the  other  banks,  which,  it  is  evident, 
would,  in  many  cases,  prove  a  severe  tax.  The  natural  and  equi- 
table way  to  have  the  notes  circulate  everywhere  in  the  country  at 
par  is  to  compel  each  bank  of  issue  to  furnish  such  ample  and  easily 
available  facilities  for  the  redemption  of  its  notes  that  they  can 
never  get  so  far  away  from  one  of  its  redemption  agents  as  to 
cause  them  to  fall  below  par  in  consequence  of  the  expense  and 
delay  in  getting  them  redeemed.  In  Canada  until  1890  the  notes 
of  the  banks  in  each  province  were  at  a  discount  in  all  the  other 
provinces,  except  where  the  bank  of  issue  established  a  branch  at 
which  it  redeemed  its  notes  in  the  other  provinces.  This  was  over- 
come by  a  law  compelling  each  bank  of  issue  to  arrange  for  the 
redemption  of  its  notes  in  the  redemption  city  of  each  province. 
There  are  seven  provinces,  and  therefore  seven  redemption  cities 
at  which  all  the  notes  of  all  the  banks  are  redeemed ;  hence  they  all 
float  at  par  and  are  all  on  an  equal  footing  wherever  they  may  happen 
to  circulate.  This  is  correct  in  principle  and  works  equitably. 
Every  bank  issuing  notes  which  the  law  compels  all  other  banks 
in  the  country,  wherever  located,  to  receive  at  par  should  be  re- 
quired, at  its  own  expense,  to  establish  such  facilities  for  the  prompt 
and  easy  redemption  of  its  notes  as  would  enable  all  the  other  banks 
to  get  them  redeemed  with  the  minimum  of  expense  and  delay,  and 
the  law  should  provide  in  detail  the  necessary  machinery  for  such 
redemption  facilities.  There  would  be  no  practical  difficulty  in 
effecting  such  an  arrangement.  We  should  have  at  least  five 
districts  and  five  redemption  cities  instead  of  three.     St.  Louis  and 


BANKING  REFORM  AND  CURRENCY  SECTION  313 

New  Orleans  should  be  added  to  the  three  already  mentioned  in  the 
bill.  Banks  outside  of  redemption  cities  could  easily  arrange  to 
have  their  principal  reserve  agent  in  the  redemption  city  of  their 
district  appointed  as  their  primary  redemption  agent,  and  through 
it  have  secondary  redemption  agents  appointed  in  each  of  the  other 
four.  In  this  way  the  notes  of  the  banks  in  each  district,  being 
redeemable  in  the  redemption  city  of  each  of  the  other  districts, 
would  circulate  on  an  equal  basis  with  the  notes  of  the  banks  of 
those  districts,  and  would  therefore  pass  current  at  par  without  any 
arbitrary  legal  requirement  that  they  should  do  so. 

Under  Section  1 1  of  Mr.  Fowler's  bill  the  banks  in  each  district 
are  prohibited  from  paying  out  the  notes  they  may  receive  of  the 
banks  in  other  districts,  but  are  compelled  to  return  them  to  the 
district  to  which  they  belong  for  redemption.  This  principle  is 
taken  from  the  old  Massachusetts  law  when  assets  currency  was  so 
successfully  circulated  in  that  state,  but  it  does  not  seem  to  me  that 
it  would  suit  existing  conditions.  It  would,  I  think,  defeat  one  of 
the  principal  benefits  to  be  derived  from  the  proposed  plan.  The 
largest  banks  in  the  country,  especially  those  in  New  York,  would 
derive  little  benefit  from  the  system  if  their  circulation  were  con- 
fined to  their  own  district.  They  would  have  the  right  to  issue 
much  more  than  the  requirements  of  their  district  would  call  for. 
At  the  same  time  the  banks  in  the  South,  with  their  demands  for 
handling  the  cotton  crop,  and  in  the  Northwest,  with  their  demands 
for  harvesting  and  shipping  the  grain,  could,  it  seems  to  me,  utilize 
to  great  advantage  the  surplus  currency  of  the  New  York  banks. 
During  the  spring  and  summer  the  deposits  of  country  banks  with 
their  correspondents  in  reserve  cities  accumulate,  and  during  the 
active  season  in  the  fall  are  withdrawn.  Tt  would  be  a  great  relief 
to  the  banks  in  reserve  cities,  with  their  large  capitalization  and 
correspondingly  large  ability  to  furnish  circulation,  to  ship  out 
their  circulating  notes  to  be  used  by  the  banks  in  need  of  them  in 
other  districts.  Take  a  transaction  as  an  illustration:  Suppo 
a  bank  in  Minneapolis  accumulates  during  the  summer  a  balance 
in  New  York  of  a  million  dollars,  which  in  the  fall  it  has  occasion 
to  reduce  by  the  actual  shipment  of  currency  to  $500,000.  It 
would  be  a  great  convenience  to  the  New  York  hank  having  to  ship 
that  currency,  if,  instead  of  --hipping,  as  it  now  does,  actual  money, 


314  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

or  what  counts  for  actual  money,  reducing  its  cash  on  hand,  it 
could  ship  its  own  notes.  It  would  thus  simply  transfer  $500,000 
of  its  liability  on  deposits  to  $500,000  liability  on  its  circulating 
notes,  without  reducing  its  cash  on  hand,  calling  in  its  loans,  or  other- 
wise contributing  to  the  usual  fall  squeeze  in  the  money  market. 
After  the  notes  shipped  by  the  New  York  bank  to  Minneapolis  had 
accomplished  their  purpose,  having  circulated  probably  through 
the  Red  River  Valley  district  during  the  fall,  they  would  return  in 
due  and  natural  course  to  the  New  York  bank  for  redemption, 
probably  by  reshipment  from  the  Minneapolis  bank  for  its  credit, 
which  would  re-establish  the  deposit  liability  and  concurrently 
cancel  the  liability  on  circulation.  The  relief  that  thus  might  be 
afforded  to  the  New  York  banks  as  well  as  to  the  banks  in  the 
other  central  reserve  cities  would  not  be  available  if  the  banks  in 
other  districts  were  prohibited  from  paying  out  anything  but  the 
notes  of  the  banks  in  their  own  district.  Section  11  of  Mr.  Fowler's 
bill  should  therefore,  in  my  opinion,  be  left  out  entirely. 

There  are  other  suggestions  which  could  be  made,  such  as 
further  facilitating  the  prompt  and  active  daily  redemption  of  the 
proposed  currency  by  making  the  expense  of  shipping  the  bills 
from  one  district  to  another  for  the  purpose  of  redemption  a  direct 
charge  against  the  general  expense  of  the  system,  to  be  paid  out 
of  the  general  tax  paid  by  the  banks.  This  would  go  a  long  way 
toward  facilitating  and  accomplishing  the  actual  daily  redemption 
which,  in  accordance  with  my  argument,  affords  the  currency  its 
elasticity. 


GOLD  RESERVE  NATIONAL  BANK  NOTES 

ADDRESS    DELIVERED    BY     WILLIAM     B.     RIDGLEY,    COMPTROLLER     OF    THE    CURRENCY, 
BEFORE    THE    GEORGIA    BANKERS'    ASSOCIATION    AT    ATLANTA,    JUNE,     IOO3. 

For  more  than  thirty  years  we  have  had  in  operation,  without 
essential  or  radical  changes,  a  national  system  of  banks  with  the 
power  of  issuing  circulating  notes.  The  system  has  well  answered 
all  expectations  and  accomplished  the  purpose  for  which  it  was 
designed.     The  notes  issued  have  in  all  respects  save  one  been  most 


BANKING  REFORM  AND  CURRENCY  SECTION  315 

admirable.  No  holder  of  a  national-bank  note  has  ever  lost  a 
dollar,  except  by  its  accidental  loss  or  destruction,  and  they  have 
been  as  free  from  forgeries  and  counterfeits  as  any  issue  of  paper 
money  can  be.  It  was  a  decided  advance  and  improvement  over 
all  previous  bank-note  currency  to  provide  that  national-bank  notes 
should  be  printed  and  furnished  by  the  Federal  government,  and 
that  they  should  all  thus  be  made  uniform  in  design,  quality,  and 
workmanship  and  issued  under  the  same  laws  and  regulations. 
Our  people  have  become  so  accustomed  to  these  notes,  uniform 
both  in  appearance  and  in  value  and  so  perfectly  reliable,  that  they 
will  refuse  to  consider  any  change  which  will  in  any  way  impair 
them  in  these  respects. 

There  has,  however,  been  one  vital  and  serious  defect  in  the 
system  since  its  very  beginning,  and  that  is  the  entire  lack  of  any 
elasticity  in  the  volume  of  the  circulation.  This  was  predicted 
when  the  act  was  being  considered  and  debated,  and  the  prediction 
was  fulfilled  soon  after  the  establishment  of  the  national  system. 
It  is  an  unavoidable  defect  in  any  system  of  currency  entirely  se- 
cured by  bonds.  Such  a  system  cannot  be  made  elastic  or  in  any 
way  responsive  in  its  volume  to  the  factors  and  conditions  which 
should  determine  such  volume.  Its  changes  are  necessarily  too 
slow  and  complicated  by  too  many  other  considerations,  such  as 
the  price  of  bonds,  which  may  have  no  relation  whatever  to  the 
supply  of  and  demand  for  circulating  notes.  The  advantages  of 
basing  these  notes  upon  United  States  bonds  at  the  time  of  the 
passage  of  the  Bank  Act  were  so  great  that  it  probably  was  the  part 
of  wisdom  to  waive  the  question  of  elasticity  for  the  sake  of  the 
greater  advantage.  At  present,  however,  with  the  experience  of 
forty  years  to  guide  us,  and  the  necessity  of  providing  a  market 
for  bonds  almost  removed,  it  is  certainly  wise  to  try  to  make  such 
changes  as  will  introduce  as  much  proper  elasticity  as  is  possible, 
if  it  can  be  done  without  in  any  way  impairing  the  good  qualities 
of  the  notes. 

There  are  several  special  and  very  important  reasons  why  such 
elasticity  is  very  necessary  to  our  currency  system.  There  is  no 
other  country  where  there  is  such  a  great  variation  in  the  amount 
of  currency  needed  for  current  cash  transactions,  owing  to  the  vast 
extent  of  our  territory,  our  varied  interests  and  enormous  business, 


3i6  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

and  the  great  value  of  crops  and  products  which  have  to  be  moved 
at  certain  seasons,  calling  for  very  large  and  varying  amounts  of 
cash.  There  is  no  other  way  so  good ;  in  fact,  there  is  no  other 
good  way  to  provide  this  needed  elasticity  but  by  means  of  bank 
notes,  if  they  can  be  made  quickly  available  when  and  where  needed, 
and  as  quickly  redeemed  and  retired  when  the  work  is  done  and  the 
demand  for  them  ceases. 

In  our  system  all  the  elasticity  must  be  supplied  by  bank  notes. 
There  is  and  can  be  no  periodical  variation  in  the  amount  of  coin 
and  certificates  in  circulation  which  can  in  any  way  respond  to  varia- 
tions in  demand.  The  volume  of  our  government  legal-tender 
notes  is  absolutely  fixed  by  statute  and  cannot  be  varied  to  meet 
changing  conditions.  Since  all  the  elasticity  in  our  supply  of  cur- 
rency must  come  from  the  bank  notes,  it  is  therefore  of  vital 
importance  that  they  be  given  this  quality  in  the  highest  degree 
possible  consistent  with  safety.  This  should  be  done  with  the 
greatest  possible  care,  in  order  that  the  essential  qualities  of  safety 
and  uniformity  in  value,  which  our  bank  notes  have  always  had  in 
so  marked  a  degree,  shall  not  be  lost  or  impaired ;  but  if  this  cur- 
rency can  be  made  more  elastic  without  danger  of  losing  these 
qualities,  it  should  be  done  at  once. 

In  any  plans  for  making  this  exchange  it  is  necessary  to  utilize 
the  present  bond-secured  currency.  We  should  not,  if  we  could, 
attempt  now  to  change  the  present  notes  radically,  or  do  away  with 
them.  The  most  conservative  and  practical  suggestion  seems  to 
be  to  make  no  change  in  the  present  bank  circulation,  but  to  allow 
the  banks  to  issue  in  addition  to  the  present  notes  a  certain  percent- 
age of  notes  uncovered  by  any  bond  deposit,  but  against  which  the 
banks  should  be  required  to  hold  in  gold  or  its  equivalent  the  same 
reserves  as  against  deposits ;  and  at  the  same  time  to  add  to  the 
laws  and  regulations  in  regard  to  redemption  as  to  provide  very 
ample  requirements  and  means  for  redemption  and  retirement. 
This  redemption  machinery  can  and  should  be  made  so  complete 
and  effective  as  to  lead  to  constant  and  frequent  redemption  of  these 
notes.  It  is  also  part  of  this  plan  to  provide  a  guarantee  fund 
for  the  payment  of  all  these  uncovered  gold-reserve  notes.  Each 
bank  will  be  required  to  pay  into  this  fund  5  per  cent,  of  its  un- 
covered notes  before  they  are  issued,  and  this  fund  is  to  be  main- 


BANKING  REFORM  AND  CURRENCY  SECTION  317 

tained  by  a  tax  on  this  circulation.  The  proportion  of  uncovered 
gold-reserve  notes  proposed  varies  from  25  to  50  per  cent.  Fifty 
per  cent,  could  be  permitted  with  safety,  but  25  is  enough  to  supply 
a  considerable  element  of  elasticity,  and  it  may  be  well  to  begin 
with  the  smaller  amount. 

It  has  been  frequently  shown,  from  figures  based  on  the  ex- 
perience of  forty  years,  that  a  comparatively  small  tax  will  produce 
a  guarantee  fund  which  will  make  every  bank  note  absolutely  safe 
in  the  hands  of  the  holder.  No  one  need  ever  know  the  name  of 
the  bank  issuing  a  note  or  whether  it  is  solvent  or  insolvent.  He 
may  be  sure  it  will  be  redeemed  for  its  full  face  value  in  gold  or 
its  equivalent.  These  figures  have  been  published  so  often  that 
it  seems  hardly  worth  while  to  repeat  them,  but  there  have  been 
so  many  objections,  based  on  the  possibility  of  impairing  the  safety 
of  the  notes,  that  I  give  some  of  them  again.  The  notes  of  all  na- 
tional banks  which  have  failed  amount  to  about  twenty  million 
dollars,  while  the  banks  have  paid  in  taxes  on  circulation  over 
ninety  million  dollars.  If  there  had  been  no  bond  security  and  no 
assets  in  the  banks,  these  taxes  would  have  paid  about  four  and 
one-half  times  the  amount  of  all  the  notes  of  these  insolvent  banks. 
For  the  whole  period  from  1863  to  1901,  inclusive,  a  tax  of  twenty- 
two  hundredths  of  one  per  cent.  (0.22  per  cent.)  on  the  outstanding 
circulation  of  all  the  banks  would  have  paid  off  the  notes  of  all  the 
insolvent  banks,  if  there  had  been  no  bond  security  and  no  assets 
in  the  banks  which  failed.  If,  as  the  present  law  provides,  the 
notes  were  a  first  lien  on  all  the  assets,  a  tax  of  eight  one-thousandths 
(0.008),  or  one  hundred  and  twenty-fifth  of  one  per  cent,  would 
have  paid  all  the  notes  which  could  not  have  been  paid  out  of  the 
assets.  The  five  per  cent,  guarantee  fund,  which  it  is  proposed 
to  provide  before  any  uncovered  notes  are  issued,  would  on  this 
basis  pay  all  the  notes  above  the  value  of  the  assets  of  the  insolvent 
bank  for  six  hundred  and  twenty-five  years,  if  tin  proportion  of 
failures  remained  the  same.  But,  it  is  argued,  conditions  may 
vary,  and  these  figures  are  based  on  experience  with  entirely  different 
bank-  notes.  It  is  not  conceivable  thai  conditions  can  so  change  that 
these  most  extraordinary  margins  of  safety  will  not  be  ample.  The 
figures  arc  so  conclusive  thai  the  question  of  the  safety  of  the  notes 
in  the  hands  of  the  public  may  be  taken  as  established.     The  smallest 


3i8  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

tax  which  is  proposed  for  the  guarantee  fund  would  be  very  ample 
to  secure  perfect  safety.  This  tax  can  be  so  small  that  any  bank 
can  afford  to  pay  it  without  raising  the  question  as  to  whetiier  it 
is  paying  to  guarantee  the  circulation  of  a  weaker  bank  or  not.  It 
need  make  no  difference  whether  the  tax  is  turned  into  the  treasury 
of  the  United  States  as  at  present,  or  used  to  guarantee  the  redemp- 
tion of  the  notes  of  other  banks. 

But  the  argument  most  frequently  seen  in  the  press  and  heard 
in  conversation  against  uncovered  gold-reserve  notes  is  that  their 
issue  will  lead  to  a  great  inflation  of  the  currency.  This  is  a  most 
serious  objection,  and,  if  it  is  true  that  inflation  would  result,  the 
plans  should  at  once  be  abandoned  forever.  After  going  through 
all  the  danger  and  trials  of  the  greenback  and  silver  craze,  and 
having  firmly  established  our  financial  system  on  the  gold  standard, 
it  would  be  the  height  of  criminal  folly  to  introduce  any  change 
in  our  currency  laws  which  would  lead  to  a  paper-currency  inflation. 
If  we  consider  carefully,  however,  the  provisions  under  which  the 
proposed  uncovered  notes  are  to  be  issued,  and,  above  all,  if  we 
bear  in  mind  that  these  notes  are  not  to  be  counted  as  bank  re- 
serves,— that  the  issuing  banks  are  to  be  compelled  to  carry  an 
ample  reserve  in  gold  or  its  equivalent  against  them,  and,  further, 
that  provision  is  made  for  such  constant  and  frequent  redemption 
that  the  notes  cannot  stay  out  any  longer  than  they  are  required 
for  current  cash  transactions, — we  shall  be  forced  to  the  conclusion 
that  there  is  no  danger  of  undue  inflation.  On  the  contrary,  this 
change  in  our  currency  laws  will  introduce  more  factors  which  lead 
to  contraction  than  to  expansion.  Both  are  necessary  in  any  good 
currency,  and,  in  fact,  if  there  is  any  difference,  contraction  is  more 
necessary  than  expansion,  or  at  least  should  be  made  the  easier  of  the 
two.  Conditions  should  be  such  that  when  there  is  no  strain 
there  should  be  a  gradual  contraction  and  just  enough  currency  be 
left  in  circulation  to  furnish  current  cash.  Then  when  the  demand 
increases  for  any  reason,  expansion  will  quickly  and  easily  follow. 
The  trouble  with  our  present  bank  notes  is  that  both  processes  are 
too  slow  and  difficult,  the  contraction  being  actually  limited  by 
statute  to  $3,000,000  per  month. 

In    considering   these    questions   there    are   a    few    fundamental 
principles  which  should  be  clearly  kept  in  mind.     They  are  not  new 


BANKING  REFORM  AND  CURRENCY  SECTION  319 

— few,  if  any,  good  financial  ideas  are — novelty  being  one  of  the 
least  desirable  qualities  in  currency  plans  of  laws.  We  are  apt  to 
lose  sight  of  them,  however,  or  become  confused  in  their  application. 

There  are  two  general  uses  for  money  or  currency  in  our  modern 
business,  which  are  so  largely  based  on  credits  and  in  which  compara- 
tively few  transactions  are  carried  out  by  the  actual  use  of  money: 

The  first  is  for  use  as  bank  reserves  against  deposits  or  circulat- 
ing notes. 

The  second  is  for  the  daily  current  cash  transactions  and  the 
payment  of  balances. 

Bank  notes  should  never  be  used  for  reserves,  their  true  use 
being  for  current  cash  business  only.  Bank  reserves  should  be  gold, 
or  some  paper  certificates  which  can  be  quickly  converted  into  gold. 
As  long  as  the  greenbacks  are  in  circulation  and  the  United  States 
carries  a  large  gold  reserve  for  their  redemption,  they  may  be  con- 
sidered as  practically  gold  certificates  and  used  for  reserves.  This 
is  not  a  good  arrangement,  but  as  long  as  we  have  these  legal-tender 
government  notes  in  circulation  as  a  part  of  our  system,  the  banks 
should  be  allowed  to  use  them  for  reserve.  We  may  also  have 
to  continue  to  use  the  silver  dollars  and  the  silver  certificates  as 
bank  reserves.  Through  the  mistakes  of  our  silver  legislation, 
we  have  this  silver  on  our  hands,  and  the  government  will  for  many 
years  have  to  bear  the  burden  of  it.  Having  once  shouldered  it 
and  provided  for  it,  we  must  make  the  best  of  it  for  the  present. 
It  will  make  the  silver  much  better  for  reserves  if  Congress,  as  it 
should,  makes  it  specifically  redeemable  in  gold. 

The  gold  coin  and  certificates  and  the  clearing-house  certificates 
for  gold  deposited  are  ideal  bank  reserves.  As  soon  as  it  can  be  done, 
the  greenbacks  should  be  redeemed  and  retired,  the  silver  also  dis- 
posed of,  and  nothing  but  gold  and  gold  certificates  used  as  bank 
reserves.  When  this  is  done,  we  shall  be  solidly  and  firmly  on  a 
real  gold  standard  basis,  and  our  financial  system  be  such  that  we 
should  have  to  take  our  proper  place  as  the  leading  commercial 
nation  of  the  world. 

Bank  notes  are  not  money  at  all,  but  mere  promises  to  pay 
money,  which  are  used  for  currency.  They  should  never,  under 
any  circumstances,  be  counted  as  reserves  for  cither  national  or 
state  banks.     It  is  surprising  how  often  the  suggestion  is  made  to 


320  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

permit  this.  Very  recently  an  officer  of  one  of  the  largest  banks 
in  New  York  told  me  he  thought  the  three-million  dollar' limit  on 
retirement  should  be  repealed,  and  the  banks  authorized  to  count 
notes  of  other  banks  as  reserve.  He  gave  the  usual  reason  that  the 
bank  notes  are  much  better  than  the  greenbacks,  as  the  bank's 
credit  adds  everything  to  the  government  bond  security.  There 
could  hardly  be  a  greater  mistake  than  ever  to  use  bank  notes  as 
reserve.  Not  that  they  are  not  good  and  safe  enough,  but  that 
such  use  removes  all  inducement  for  any  one  to  send  a  bank  note 
home  for  redemption,  and  puts  an  end  to  all  possibility  of  making 
our  currency  elastic.  Instead  of  decreasing  the  inducements  for 
redemption,  we  should  increase  them  in  every  reasonable  way. 

The  only  proper  use  of  bank  notes  is  for  the  current  cash  trans- 
actions necessary  in  the  business  of  the  community.  Bank  notes 
are  the  best  possible  form  of  currency  for  this  use  if  made  properly 
elastic  and  responsive  to  the  demand.  The  composite  result  of 
having  each  bank  supply  to  its  own  customers  what  currency  they 
need,  and  these  customers  present  it  for  redemption  when  it  is  not 
needed,  is  the  best  way  to  regulate  the  amount  of  currency  which 
should  be  in  circulation.  It  is  infinitely  better  than  any  regulation 
by  statute  or  by  any  officer  of  the  government.  Such  a  currency 
would  be  more  efficient  and  more  economical.  It  would  save  ex- 
pensive transfers  of  currency  from  distant  parts  of  the  country. 
It  would  lessen  the  liability  of  disturbance  in  all  our  financial  affairs 
and  would  be  a  source  of  strength  in  case  of  threatened  or  actual 
trouble.  It  would  be  better  than  an  emergency  circulation;  it 
would  prevent  many  emergencies  and  be  a  great  help  in  meeting 
any  which  might  arise.  It  would  lessen  the  danger  of  both  expan- 
sion and  contraction  and  prevent  inflation  of  the  currency.  A  cur- 
rency not  available  for  reserves  and  protected  by  gold  reserves 
and  ample  facilities  for  redemption  would  not  be  made  the  basis  for 
undue  inflation  of  credits  or  used  for  speculation.  It  would  only  be 
used  for  those  legitimate  enterprises  which  have  a  proper  basis  of 
credit,  and  only  to  furnish  the  cash  as  long  as  it  was  needed  for 
cash  transactions. 

We  cannot  by  legislation  increase  the  supply  of  money  which 
should  properly  be  used  for  bank  reserves.  The  addition  to  our 
currency    in    circulation    of   such   an   amount   of   uncovered   gold- 


BANKING  REFORM  AND  CURRENCY  SECTION  321 

reserve  bank-note  currency  as  the  banks  could  keep  out  would  add 
to  the  available  reserves  part  of  the  reserve  money  now  outside  the 
banks  for  use  in  current  cash  transactions.  But  a  large  part  of  this, 
would  have  to  be  used  as  reserve  against  the  gold-reserve  notes, 
so  that  it  would  not  add  such  an  amount  to  our  bank  reserves  as  to 
lead  to  undue  inflation.  The  banks  can  just  as  well  and  safely  be 
trusted  to  issue  such  gold-reserve  currency  as  they  can  be  trusted 
with  deposits  to  be  lent  to  their  customers.  They  will  only  pay  it 
out  for  value,  and  will,  in  self-protection,  be  more  careful  about 
lending  it  than  they  now  are,  because  they  must  provide  reserves 
and  must  always  count  upon  its  being  sent  back  for  redemption 
when  no  longer  needed. 

Owing  largely  to  the  kind  of  paper  which  we  have  had  in  cir- 
culation for  forty  years,  the  popular  idea  of  paper  currency  has  be- 
come perverted.  The  government  has  the  power  to  issue  and  to 
keep  in  circulation  a  large  amount  of  currency.  This  can  be  issued 
by  being  paid  out  for  the  government  expenses.  As  it  comes  back 
it  can  be  paid  out  again,  and  when  revenues  exceed  expenses  it  can 
be  deposited  in  banks,  and  thus  kept  in  circulation.  The  bulk  of 
our  paper  currency  has  been  for  so  many  years  government  issues 
thus  kept  in  circulation,  that  it  has  come  to  be  assumed  that  if  any 
given  amount  of  currency  is  authorized  it  will  at  once  be  issued 
and  maintained  in  circulation.  This,  however,  is  not  true  of  bank- 
note circulation  not  available  as  reserves,  for  which  prompt  and 
constant  redemption  is  assured.  A  bank  has  no  such  means  of  put- 
ting its  notes  in  circulation  as  the  government.  Its  expenses  are 
comparatively  very  small,  and  it  can  pay  out  notes  only  in  exchange 
for  value  of  some  kind.  If  paid  out  in  exchange  for  the  note  of  a 
customer  or  in  payment  of  a  check  against  deposits,  notes  will  stay 
out  only  as  long  as  they  are  needed  for  cash  transactions.  As 
soon  as  the  demand  slackens,  the  notes  will  either  come  back  to  the 
issuing  bank  or  be  deposited  in  some  other  bank.  This  bank  will, 
as  soon  as  possible,  send  them  for  redemption,  so  as  to  convert  them 
into  something  which  can  be  counted  as  reserve.  The  notes  must 
be  easily  and  promptly  redeemable  in  L,ro]d  or  its  equivalent.  This 
is  the  vital  point  of  the  whole  plan,  and  is  (he  most  potenl  force 
with  which  to  make  the  bank  note  currenc}  'la-tic  and  automatic- 
ally elastic.  When  currency  is  wanted,  the  banks  can  and  will 
21 


322    PRACTICAL  TROBLEMS  IN  BANKING  AND  CURRENCY 

supply  it.  When  the  supply  of  notes  exceeds  the  demand,  they 
must  redeem  the  notes  and  retire  them  until  needed  again.  If  the 
same  reserve  is  required  to  be  maintained  against  the  gold-reserve 
notes  as  against  deposits,  it  will  make  no  difference  to  the  bank 
whether  a  borrower  takes  the  notes  of  the  bank  away  with  him,  or 
leaves  the  proceeds  of  his  note  on  deposit  with  the  bank,  except  so 
far  as  the  note  circulation  is  taxed  by  the  government.  It  is  the 
very  fundamental  principle  of  bank-note  circulation  that  there  is 
no  difference  to  the  bank  between  the  bank-note  credit  and  the  de- 
posit credit.  They  are  both  obligations  of  the  bank  and  exactly  the 
same  thing  so  far  as  the  bank  is  concerned.  It  is  only  a  question 
of  the  convenience  of  the  customer,  whether  he  leaves  the  credit  in 
the  shape  of  a  deposit  to  be  checked  against  or  takes  the  notes  to  be 
used  as  cash.  It  is  not  so  much  a  privilege  of  the  bank  to  issue 
the  notes  as  it  is  a  privilege  of  the  customer  to  do  whichever  suits 
him  best. 

It  is  important  that  it  shall  be  thoroughly  understood  that  there 
is  no  difference  between  the  deposit  credit  and  the  bank-note 
credit,  and  that  bank  notes  which  are  protected  by  a  gold  reserve, 
quickly  and  easily  redeemable  and  not  available  for  reserves,  will 
not  stay  in  circulation  in  greater  volume  than  is  needed  for  current 
cash  transactions.  With  these  principles  fixed  in  our  mind,  there 
will  be  no  justifiable  fear  of  inflation  from  such  notes.  Any  bank 
which  can  be  trusted  with  deposits  can  be  trusted  to  issue  the  notes. 
The  guarantee  fund  will  make  the  notes  of  any  bank  safe  in  the 
hands  of  every  holder,  no  matter  what  happens  to  the  bank.  The 
main  safety  of  the  whole  system,  however,  is  the  gold  reserve  and 
the  constant  current  redemption.  Constant  and  frequent  redemp- 
tion cannot  be  too  strongly  insisted  upon.  The  notes  must  be  per- 
fectly free  to  come  and  go,  and  thus  freely  follow  supply  and 
demand. 

The  notes  of  the  Suffolk  bank  system  were  the  best  paper  cur- 
rency we  ever  had  in  America,  and  they  were  kept  good  by  frequent 
redemption,  although  they  were  purely  credit  notes.  The  system 
grew  and  was  successful  without  government  aid,  because  it  was 
based  on  correct  principles.  The  worst  bank  notes  we  ever  had 
were  the  "wildcat"  bank  notes  in  the  West,  which  were  bond- 
secured.     In  the  states  where  they  required  reserves  and  provided 


BANKING  REFORM  AND  CURRENCY  SECTION  323 

for  current  redemption  the  bank  notes  were  good,  but  where  they 
depended  on  the  bond  security  they  were  very  bad. 

The  chief  trouble  with  our  present  bank  notes  is  that  the  supply 
is  hardly  in  the  slightest  degree  regulated  by  the  demand.  It  mainly 
depends  on  the  price  of  bonds,  and  the  profit  on  circulation  is  so 
very  small  that  the  banks  are  compelled  to  figure  to  small  fractions 
to  see  whether  it  pays  or  not.  The  issue  of  circulation,  instead  of 
being  the  exercise  of  one  of  the  most  proper  and  useful  functions 
of  a  bank,  in  supplying  currency  as  needed  by  the  people,  becomes 
rather  a  speculation  in  bonds,  and  there  are  thus  introduced  into  the 
regulation  of  the  volume  of  the  currency  factors  which  have  no 
proper  relation  to  it  whatever. 

The  Secretary  of  the  Treasury  has  recently  very  wisely  and 
properly  encouraged  the  increase  of  circulation,  in  anticipation  of 
the  demand  which  may  be  hard  to  supply  next  autumn.  The  out- 
standing notes  are  now  for  the  first  time  over  four  hundred  million 
dollars.  No  one  can  tell  whether  this  is  enough  or  too  much,  or 
how  much  more  it  may  be  by  September  or  October  next.  How 
much  better  it  would  be  if  we  had  a  system  which  would  automatic- 
ally adjust  this  amount,  each  bank  supplying  its  own  customers 
according  to  their  needs.  There  is  far  more  danger  of  inflation 
because  these  bond-secured  notes  become  redundant,  than  there 
would  be  if  the  banks  could  issue  a  portion  of  their  circulation  in 
uncovered  gold-reserve  notes,  with  such  proper  redemption  require- 
ments that  they  would  retire  themselves  when  no  longer  needed, 
and  could  be  kept  out  only  by  exertions  on  the  part  of  the  bank,  and 
then  only  as  long  as  they  were  demanded  by  the  public  for  current 
cash  transactions. 

Objection  is  frequently  heard  to  having  a  great  number  of  small 
brinks,  widely  scattered,  issue  uncovered  notes.  On  thorough  con- 
sideration this  objection  does  not  seem  to  be  serious,  and  there  are 
some  counterbalancing  advantages.  The  notes  being  furnished 
by  the  government,  there  is  no  danger  of  fraudulent  over-issue.  The 
proposed  proportion  of  uncovered  note-  to  the  capital  of  the  bank 
is  not  large,  and  the  regulations  could  be  made  such  as  to  remove 
the  temptation  to  organize  the  banks  for  the  note  issue  only.  The 
constant  redemption  spoken  <<f  so  often  would  check  this.  Those 
of  you  who  remember  the  time  when  you  had  notes  out  which  you 


324  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

were  constantly  looking  to  have  presented  for  redemption  doubtless 
realize  that  such  notes  are  a  source  of  considerable  anxiety  and 
solicitude.  These  small  banks  are  now  allowed  to  take  unlimited 
deposits.  On  account  of  the  guarantee  fund  the  notes  will  be  safer 
than  the  deposits.  If  the  banks  are  fit  to  take  unlimited  deposits, 
they  are  fit  to  issue  a  limited  quantity  of  notes,  protected  by  a  gold 
reserve.  One  chief  advantage  of  the  issue  by  the  number  of  banks 
is  that  the  gauge  of  the  quantity  needed  by  widely  scattered  banks, 
each  in  close  touch  with  its  own  customers  and  community,  would 
be  the  best  possible  way  to  determine  the  proper  amount  required. 
They  would  feel  and  supply  the  demand  more  quickly  and  collect 
and  retire  the  notes  more  promptly,  quietly,  and  with  less  disturb- 
ance, when  these  were  no  longer  needed  in  circulation. 

It   is   not  claimed  by  the  most   enthusiastic   advocates  of   this 
change  in  our  currency,  that  it  will  cure  all  our  financial  ills.     We 
cannot  by  any  means  yet  known  prevent  speculation  and  overtrad- 
ing.    It  seems  to  be  a  fixed  law  in  all  human  affairs,  and  especially 
in  business,  that  events  run  in  cycles,  and  that  we  are  bound  to  have 
periods  of  too  great  activity,  followed  by  corresponding  periods  of 
depression.     Modern  business  is  the  result  of  the  development  of 
credit,  and  must  be  done  largely  on  credit  to  be  done  at  all.     There 
never  is  a  time  when  there  is  money  enough  to  liquidate  all  out- 
standing credits,  or  even  any   large  part  of  them.     We  are  thus 
always   exposed   to   the   possibility   that   some    unexpected  and   un- 
avoidable event  will  lead  to  such  a  demand  for  liquidation  that  many 
who  have  debts  cannot  meet  them,  and  this  will  lead  to  a  panic  or 
crisis,  followed  by  a  period  of  depression  in  all  lines  of  business 
and  trade.     It  is  idle  to  expect  to  cure  or  change  this  by  legis- 
lation, but  we  may  by  proper  financial  and  currency  laws  remove 
some  of  the  causes  of  disturbance  and  diminish  the  chances  of  sudden 
demands   for  liquidation.     We  are  confronted  with  a  situation  in 
business  to-day,  one  of  the  dangers  of  which  is  the  fear  of  a  demand 
for  currency  next  autumn  which  may  check  business  of  all  kinds. 
Being  forewarned  and  expecting  it,  every  one  is  now  making  every 
possible  preparation  for  it,  and  in  this  there  is  much  reason  for  hope 
that   serious   trouble   may   be   avoided.     It   may    be   said   that   this 
situation  is  not  due  to  our  currency  laws,  but  to  entirely  different 
causes.     This   may   be,   and   doubtless    is,   largely   true.     But   our 


BANKING  REFORM  AND  CURRENCY  SECTION 


325 


currency  and  banking  system  is  a  great  factor  in  the  situation,  and 
if  we  had  a  better  and  more  elastic  bank  currency,  it  would  be  a 
source  of  strength  now  when  needed.  If  our  banks  had  been  in  the 
habit  of  supplying  the  varying  demands  for  currency,  and  an  auto- 
matic elastic  system  were  in  operation  which  all  knew  would  take 
care  of  the  demand  as  it  came,  there  would  have  been  no  necessity 
that  extra  endeavors  be  made  by  the  United  States  Treasury  to  in- 
crease the  circulation ;  and  there  would  also  be  less  danger  of  in- 
flation from  such  a  circulation  as  could  then  be  issued  and  expanded 
than  from  our  present  bond-secured  circulation,  which,  after  it  has 
been  expanded,  can  only  be  contracted  at  the  rate  of  $3,000,000  per 
month.  This  is  a  matter  of  far  greater  importance  to  the  people 
who  want  and  need  this  money  than  it  is  to  the  banks.  A  man  who 
wants  currency  for  his  business  and  cannot  get  it  is  much  worse 
off  than  the  banker  who  cannot  furnish  it.  It  may  only  mean  a 
loss  of  profit  to  the  bank  when  it  means  ruin  to  the  customer. 

The  people  who  want  this  currency  for  handling  their  crops 
and  products  are  entitled  to  the  credit  based  on  the  wealth  of  market- 
able articles  they  have  produced.  They  are  entitled  to  it  in  the 
shape  which  is  most  convenient  to  them,  whether  as  a  bank  deposit 
subject  to  check,  or  current  cash.  It  is  the  duty  of  the  government 
to  supply  them  with  the  best  facilities  which  can  be  devised,  and  to 
enact  such  laws  as  will  enable  the  banks  to  serve  their  customers 
to  the  best  possible  advantage  to  the  whole  country.  This  question 
is  a  matter  of  equal,  if  not  greater,  importance  to  the  entire  business 
community,  who  find  every  year  their  calculations  interfered  with, 
if  not  overthrown,  by  the  annual  disturbance  which  is  due  to  the 
demand  for  currency  to  move  the  crops.  That  we  allow  this  to  go 
on  year  after  year  without  any  attempt  to  cure  or  stop  it,  is  an 
absolute  disgrace  to  us. 


326   PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 
SOUND  VERSUS  SOFT  MONEY 

ADDRESS  DELIVERED  BY  ANDREW  JAY  FRAME,  I'RESIDENT  OF  THE  WAUKESHA 
NATIONAL  BANK,  WAUKESHA,  WIS.,  BEFORE  THE  WISCONSIN  BANKERS'  AS- 
SOCIATION,    AT     MILWAUKEE,    AUGUST,     IOX>3. 

I  GRIEVE  to  disagree  with  some  of  my  good  friends,  yet  I  yield 
to  no  man  in  patriotism.  I  desire  ameliorated  conditions.  When 
we  sum  up  the  years  of  agitation  for  asset  currency  and  a  sound 
solution  of  the  elastic  problem,  and  find  that  the  only  product  that 
has  been  seriously  considered  to  date  is  the  Fowler  bill — to  the 
fallacies  of  which  I  make  specific  reference  hereafter — I  conclude 
it  is  easier  to  criticise  than  provide  a  remedy  for  incurable  diseases. 
The  disease  under  discussion  might  be  diagnosed  as  "hard  up." 
A  large  majority  of  the  human  family  have  an  annual  attack  of 
it,  and  many  have  it  in  chronic  form.  Issuing  I.  O.  U.'s  will  rarely 
cure  the  malady,  but  liberal  libations  of  conservatism  wonderfully 
ameliorate  severe  attacks. 

The  battle  of  the  standards  which  have  been  fought  in  the 
United  States  for  more  than  a  quarter  of  a  century,  culminated  suc- 
cessfully March  14,  1900,  in  the  adoption  of  the  world's  standard, 
gold.  Since  then,  instead  of  strengthening  our  foundations  by 
unequivocal  laws,  making  our  vast  quantity  of  inferior  silver  coin — 
which  is  ever  decreasing  in  intrinsic  value — redeemable  in  gold ; 
instead  of  wiping  out  our  greenbacks,  thus  removing  another  bur- 
den from  the  government  which  is  not  tolerated  by  any  progressive 
nation,  the  burden  of  song  has  been  to  undermine  our  present 
foundation  by  the  injection  of  an  additional  quantity  of  inferior 
currency  called  asset  currency,  under  conditions  not  paralleled  in 
any  progressive  country,  and  which,  as  certain  as  the  laws  of 
gravitation,  will  drive  our  gold  abroad  under  the  Gresham  Law, 
or  produce  still  further  inflation  in  prices,  resulting  in  riotous  specu- 
lative ventures,  and  consequent  deeper  depression  when  the  ebb  tide 
in  our  prosperity  sets  in.  Such  a  result  is  as  inevitable  as  that 
history  repeats  itself.  The  Kaffir  proverb,  that  "he  who  will  not 
profit  by  the  experience  of  the  past,  gets  knowledge  when  trouble 
overtakes  him,"  has  no  terrors  for  the  speculator.  Under  the 
impetus  of  rapid  fortune  acquired  by  some,  in  the  swelling  tide  of 
prosperity,  the  get-rich-quick  fever  has  intoxicated  the  many. 
Some  men  ordinarily  conservative   have  wavered  in   their   course 


BANKING  REFORM  AND  CURRENCY  SECTION  327 

and  been  drawn  into  the  maelstrom  of  underwriting  speculative 
combinations  in  the  hope  of  excessive  profits.  The  promoters  have 
not  been  able  to  sell  enough  of  their  watered  stock  to  the  innocents 
to  pay  loans,  so  banks  might  meet  the  call  of  the  country  for  cash 
to  move  the  crops ;  and  under  this  plea,  together  with  the  unsolved 
sound  solution  of  the  elastic  problem,  the  common  complaint  of  all 
ages  for  "more  money"  is  heard  abroad  in  the  land,  when  over- 
speculation  is  primarily  the  cause  of  trouble.  In  fact,  crops  could 
not  move  faster,  as  transportation  facilities  are  taxed  to  their 
utmost  every  fall.  This  is  rather  a  grave  charge,  but  let  us  diag- 
nose the  case  and  draw  conclusions  as  to  its  merits. 

Britain,  after  a  campaign  as  long  and  bitter  as  ours  over  the 
Gresham  Law,  and  the  expulsion  of  her  gold  by  the  injection  of 
too  many  bank-notes  into  her  circulation,  unequivocally  adopted 
the  gold  standard  in  1816.  The  integrity  of  that  standard  as 
against  the  uncertainties  of  other  national  standards  has  been  main- 
tained with  a  fidelity  that  commands  the  confidence  of  the  world  to 
the  extent  that  London  has  long  been  the  world's  clearing-house. 
Will  New  York  soon  win  that  center  if  we  inject  an  additional 
quantity  of  inferior  currency  into  our  circulation? 

Christ  said  that  a  wise  man  builded  his  house  upon  a  rock,  but 
the  foolish  man  upon  the  sand.  When  the  rain  descended,  and  the 
floods  came,  and  the  winds  blew,  the  wise  man's  house  fell  not,  but 
as  to  the  foolish  man's  house  great  was  the  fall  thereof.  Is  not  this 
a  perfect  simile  to  apply  to  the  building-up  of  the  superstructure 
of  our  great  credit  system  upon  a  sound  metallic  currency  for  a 
foundation  as  against  the  sands  of  a  credit  currency?  The  pages 
of  history  are  strewn  with  proofs  that  when  the  great  instrument 
of  exchange  is  deranged,  all  trade,  all  industry,  is  stricken  as  with 
a  palsy.  That  instrument  of  exchange  recognized  by  the  world 
as  the  solid  foundation  that  does  not  totter  when  the  storm  rages 
in  its  severest  intensity,  is  the  only  foundation  for  a  prosperous 
people  to  rest  upon;  and  to-day  our  coffers  hold  over  a  billion 
dollars  of  it.  This  is  a  billion-dollar  country,  and  we  need  it.  This 
gold  has  come  to  us  since  1873  in  the  natural  course  of  trade,  in 
response  to  the  well-known  principles  of  the  Gresham  Law  and 
monetary  science,  as  expounded  by  Adam  Smith,  Ricardo,  Jevons, 
Sumner,  and  many  other  eminent  economists,  and  as  also  clearly  set 


328    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

forth  in  what  Professor  Sumner  dubs  the  most  important  document 
in  financial  literature,  "the  celebrated  bullion  report  of  1810  to  the 
House  of  Commons."  I  have  quoted  these  maxims  before,  but 
deep-seated  error  requires  repetition  of  them  again  and  again. 
Summed  up,  these  principles  are: 

1.  That  rich  countries  will  have  all  the  coin  they  need,  provid- 
ing no  impolitic  act  of  legislation  interferes  to  force  it  out  of  cir- 
culation by  the  injection  of  inferior  currencies. 

2.  When  the  coin  in  any  country  exceeds  the  effectual  demand, 
no  vigilance  of  government  can  prevent  its  exportation. 

3.  It  is  the  province  of  government  to  settle  the  quality  ques- 
tion of  money,  and  the  needs  of  commerce  will  settle  the  quantity. 

In  proof  of  the  above  maxims,  history  says,  Chinese  walls, 
jails,  shotguns,  or  hanging  did  not  prevent  exportation  of  coin, 
and  in  these  modern  days  the  object-lesson  of  the  exportation  of 
more  than  twenty-five  millions  of  gold  in  the  past  three  months, 
in  the  face  of  the  plea  of  the  asset  currency  advocates  for  "more 
money  in  the  United  States,"  is  more  potent  than  pages  of  logic. 

Let  us  fix  the  "quality"  question  and  stop  tinkering  with  the 
"quantity,"  as  the  needs  of  commerce  will  settle  that. 

From  the  latest  reports  of  approximate  stocks  of  money  in  the 
world,  I  will  quote  a  few : 

IN  MILLIONS 


Popula- 
tion 

Gold 

Silver 

Uncov- 
ered 
Paper 

Total 

Total  per 
Capita 
Circula- 
tion 

France 

80 
42 
39 
57 
130 

5lA 

$1,250 
528 
903 

7i5 
20 

$670 

117 
420 
207 
103 

5 

$580 
117 
134 
153 

say  50 

$2,500 

762 

i,457 

1,123 

828 

75 

$30.00 
18.29 
37-38 

Germany 

19.92 

Russia 

6.25 

Canada 

13-63 

In  1873  the  United  States  had  $18  per  capita  circulation,  or  a 
total  of  $750,000,000,  and  practically  all  in  promises  to  pay,  Cali- 
fornia and  vicinity  refusing  to  adopt  soft  money.  To-day,  after 
our  battle  for  sound  money,  according  to  the  above  table,  we  have 
about  $30  per  capita,  or  $1,250,000,000  of  gold  and  practically  the 
same  amount  of  inferior  money,  our  vast  hoard  of  silver  being 
nearly  two-thirds  fiat.     If  an  additional  quantity  is  needed,  let  gold 


BANKING  REFORM  AND  CURRENCY  SECTION 


329 


flow  in  under  natural  economic  laws,  the  same  as  the  $1,250,000,000 
have  already  done,  $62,000,000  in  1902  being  added  to  our  stock. 
Let  us  not  inject  inferior  asset  currency  on  top  of  our  present  ex- 
cessive soft-money  stock  and  drive  gold  out,  thus  undermining 
our  household. 

The  unprecedented  production  of  gold  for  the  past  few  years 
has  paved  the  way  for  supplying  all  the  gold  this  "rich  country" 
needs  to  fill  the  channels  of  trade.  The  increase  to  nearly  $400,- 
000,000  in  gold  certificates  in  the  past  three  years,  to  save  abrasion 
and  perfectly  serve  our  wants  in  every  way,  is  in  line  with  the 
trend  of  all  Europe  as  expressed  by  Professor  Edmund  Thery  in 
L'Economiste  Enropcen  in  1898.  He  said  that  the  gold  in  Euro- 
pean banks  increased  in  fourteen  years — 1883  to  l%97 — from 
$700,000,000  to  $1,700,000,000,  and  that  "in  all  sound-money 
countries  the  bank-note  is  in  course  of  becoming  a  simple  gold 
certificate  redeemable  on  demand." 

I  assert  without  fear  of  intelligent  contradiction,  that  the  new 
Fowler  bill  for  asset  currency  to  be  issued  by  thousands  of  banks, 
large  and  small,  has  no  parallel  in  any  progressive  country;  that  it 
it  a  discarded,  unsuccessful  experiment  of  the  past ;  that  it  is  un- 
sound, and  gives  preferences  to  picayune  creditors  as  against  the 
larger  creditors,  the  millions  of  depositors,  thus  producing  distrust ; 
and  distrust  breeds  panic.  It  also  lowers  our  standard.  Let  us 
particularize  a  little. 

Canada  has  thirty-five  large  banks  with  about  $70,000,000  of 
capital  (which  has  grown  very  little  in  twenty-five  years)  and 
about  $40,000,000  of  surplus.  They  have  many  branches.  They 
issue  currency  based  on  a  5  per  cent,  deposit  and  a  first  lien  on 
assets.  The  right  to  issue  notes  is  limited  to  banks  with  not  less 
than  $500,000  subscribed  capital.  Banks  pay  out  only  their  own 
notes,  sending  others  home  for  redemption.  What  is  the  result? 
Canada  has  3,500,000  square  miles  of  territory,  or  about  thai  of 
the  United  States  including  \laska,  and  much  of  it  very  productive; 
her  population  is  a  measly  5,500,000;  her  total  hanking  power  is 
not  equal  to  that  of  little  Massachusetts  with  only  8,315  square 
miles  of  territory;  neither  is  it  equal  to  that  of  Illinois,  Pennsyl- 
vania, or  New  York. 

We  hear  the  cry   for  "more  money"  in  the  United  States.     P»v 


33o 


PRACTICAL  PRORLEMS  IN  BANKING  AND  CURRENCY 


the  foregoing  table  we  have  $30  per  head — one-half  gold.  Canada 
averaged  in  1902  about  $13.63  per  head,  and  of  that  only  $3.64  per 
head  is  gold.  Would  inferior  asset  currency  furnish  our  live 
country  with  its  vast  foreign  trade  an  ample  quantity  of  interna- 
tional money  or  drive  out  gold  under  the  Gresham  Law?  If  the 
banking  system  of  Canada  has  anything  to  do  with  her  lack  of 
progress,  then  let  us  stand  by  our  system  under  which  our  progress 
seems  to  know  no  bounds.  Comparison  with  unprogressive 
Canada  is  simply  ridiculous. 

The  Bank  of  England  issues  £18,175,000  of  notes  on  a  deposit 
of  the  same  amount  of  government  securities.  It  has  30  to  40 
million  pounds  sterling  in  notes  outstanding  constantly  in  addition, 
but  every  note  has  its  value  in  gold  behind  it.  The  large  banks  of 
England,  Scotland,  and  Ireland  in  1844  and  1845  were  limited 
to  the  amount  of  their  then  outstanding  uncovered  notes,  and  70 
per  cent,  of  the  right  of  issue  of  any  of  these  banks  going  out  of 
business    since    that    date   has    reverted   to   the   Bank    of   England. 

Since  1844  this  has  reduced  the  maximum  uncovered  issues 
£6,000,000  and  added  £4,175,000  to  the  Bank  of  England  issues. 
Of  late  the  whole  amount  of  asset  currency  issued  by  all  the 
big  issuing  banks  of  England,  Scotland,  and  Ireland  has  been 
approximately  the  insignificant  sum  of  £5,000,000  sterling,  or 
about  two-thirds  of  the  maximum  allowed,  and  all  the  rest  of 
their  circulation  has  government  securities  or  gold  behind  it. 
What  is  the  secret?  Inability  to  pay  out  any  notes  but  their  own, 
and  unlimited  liability  of  every  bank  stockholder  for  every  note 
in  circulation.  How  much  circulation  would  our  banks  issue  if 
under  such  restrictions,  including  an  "unlimited  liability"  clause  on 
issues?  The  clear  intent  of  Britain  is  entirely  to  eliminate  bank- 
note currency  from  her  circulation,  excepting  only  that  of  the  Bank 
of  England.  Mr.  Fowler,  at  New  Orleans  and  before  a  committee 
in  Congress,  stated  that  Scotland  could  issue  $148,000,000  asset 
currency.  When?  In  1845  tne  uncovered  circulation  maximum 
allowed  by  law  was  £3,087,209,  and  in  1898  it  was  £2,676,350 — 
according  to  the  Monetary  Commission  report — (see  p.  281) — 
and  Sound  Currency  Red  Book  (p.  187). 

Since  1848  the  Bank  of  France  has  had  the  sole  right  of  issue 
in  France.     Mr.  Fowler,  in  his  zeal  for  asset  currency,  states  that 


BANKING  REFORM  AND  CURRENCY  SECTION  331 

the  Bank  of  France  can  issue  $1,000,000,000  of  notes,  but  he  fails 
to  state  that  the  Bank  of  France  of  late  years  has  had  approximately 
$700,000,000  of  circulating  notes  outstanding,  and  has  kept  about 
90  per  cent,  of  its  outstanding  notes  in  coin  in  its  vaults.  If  the 
small  deposit  account  of  say  $150,000,000  is  added  to  the  circulation, 
the  average  coin  reserve  has  been  about  75  per  cent,  of  the  whole. 
(Let  us  not  forget  that  the  coin  reserve  of  national  banks  is  but  8 
per  cent,  of  such  liabilities.)  That  great  reserve  of  coin  naturally 
inspires  confidence.  The  balance  of  its  liabilities  even  is  partially 
covered  by  loans  to  the  government,  so  that  the  bank  could  pay 
over  75  per  cent,  of  all  its  liabilities  by  selling  its  government  paper 
without  calling  a  dollar  of  its  loans.  The  Bank  of  France  is  more 
a  bank  of  issue  than  a  bank  of  deposit,  as  its  issues  have  averaged 
five  times  its  deposits  for  many  years. 

The  Imperial  or  Reichsbank  of  Germany  is  allowed  a  maximum 
issue  of  uncovered  notes  to  the  amount  of  about  $120,000,000. 
Five  per  cent,  interest  is  charged  on  issues  in  excess  of  this  for 
emergencies.  For  ten  years  past  it  has  had  a  metallic  reserve  of 
say  80  per  cent,  on  an  average  circulation  of  about  $300,000,000. 
Add  deposits  to  circulation  and  the  reserve  of  both  has  been  about 
60  per  cent.  The  many  other  issuing  banks  are  now  reduced  to 
only  five  large  banks  that  are  allowed  to  issue  asset  circulation  to 
the  extent  of  the  comparatively  insignificant  sum  of  $18,000,000, 
any  excess  being  covered  by  treasury  notes  (which  notes  are  fully 
covered  by  gold  in  the  government  war-chest),  notes  of  other  banks, 
or  coin.  L.  Carroll  Root  says:  'The  National  (or  Imperial) 
Bank  is  the  center  of  the  system,  with  the  evident  intent  on  the 
part  of  the  government  ultimately  to  transfer  to  it  the  sole  right  of 
issue.  Now  note:  The  issue  of  the  uncovered  notes  allowed  a  fezu 
years  ago  in  order  to  nurse  along  the  speculative  adventurers  re- 
sulted disastrously,  and  Germany  has  been  in  a  depressed  financial 
condition  ever  since.  If  only  the  5  per  cent,  emergency  currency 
had  been  issued,  the  speculative  fever  would  probably  have  been 
checked  before  serious  trouble  ensued. 


3V 


PRACTICAL  TROBLEMS  IN  BANKING  AND  CURRENCY 


The  following  countries  have  only  one  bank  of  issue: 


Capital 


rhe  Hank  of  Austria $45,000,000 

Hank  of  Belgium 10,000,000 

I'.ank  of  Netherlands 6,333,000 

Bank  of  Norway 3.333,ooo 

National  Bank  c  f  Denmark  7,250,000 


Imperial  Bank  of  Russia. 


20,000,000 


Reserves  Required  on  Note  Issues 


40%  coin  and  60%  quick  assets 
33//2%  coin  on  notes  and  deposits 
33^2%  coin  on  notes  and  deposits 
50%  as  to  notes  in  coin 
i7lA%  as  to  notes  in  coin  and  150% 

assets  besides 
Over  100%  


There  are  three  large  banks  in  Italy  and  three  in  Greece. 
Sweden  has  a  large  state  bank,  and  some   private  banks  that  issue  cur- 
rency based  on  a  deposit  of  mortgages,  etc.,  in  public  custody. 

It  is  not  clear  from  the  foregoing  that  the  great  centralized  in- 
stitutions of  European  nations  are  assuming  the  issuing  functions 
of  the  currency,  with  a  metallic  foundation,  as  heretofore  referred 
to  in  Professor  Thery's  article? 

What  about  former  New  England  Banking,  the  Suffolk  system, 
the  Banks  of  Indiana  and  Louisiana,  and  several  others  so  often 
quoted  by  asset-currency  advocates  ?  Simply  this :  On  pages  302 
of  the  report  of  the  Monetary  Commission,  under  the  head  of  "New 
England  Bank  Currency,"  we  find  that  "in  some  states  an  unlimited 
liability  for  both  notes  and  deposits  was  enforced  upon  the  officers 
in  case  of  mismanagement.  In  some  instances  the  stockholders 
were  liable  to  the  amount  of  their  stock  for  the  ultimate  payment 
of  the  notes,  and  in  Rhode  Island  they  were  subject  to  unlimited 
liability." 

Under  the  "Suffolk  System"  each  country  bank  kept  $2,000  on 
deposit  in  Boston  without  interest.  Banks  were  compelled  to  pay 
out  only  their  own  notes,  and  send  all  others  to  Boston  for  redemp- 
tion. This  compulsory  redemption,  lack  of  confidence  in  paper 
money  generally,  and  scarcity  of  gold  in  those  days  brought  about 
the  redemption  of  bank-notes  in  that  system  ten  times  over  every 
year,  thus  entailing  exasperating  annoyances,  constant  assorting, 
and  expense  for  express,  etc. ;  and  history  says :  "Country  banks 
were  loud  in  denunciation  of  the  system,  and  there  was  always 
friction  between  the  city  and  country  banks."  With  all  the  rigid 
regulations  the  loss  to  holders  of  notes  in  failed  banks  in  that 
small  system  was  $877,327.  As  no  man  has  ever  lost  a  dollar  in  the 
past  forty  years,  nor  sleep  either,  under  our  vast  national  system, 
distrust  is  entirely  eliminated ;  therefore  no  one  troubles  himself 
about  redemption. 


BANKING  REFORM  AND  CURRENCY  SECTION  333 

In  the  Sound  Currency  Red  Book,  in  an  article  by  Horace  White, 
a  strong  advocate  of  asset  currency,  we  find  (pp.  207-10),  under 
the  head  of  "State  Bank   of  Indiana": 

On  all  applications  for  loans  above  $500,  a  majority  vote  of  five-sevenths 
of  the  board  was  necessary,  and  this  must  be  entered  on  the  minutes  with  the 
names  of  the  directors  so  voting.  Directors  were  individually  liable  for 
losses  resulting  from  infraction  of  the  law,  unless  they  had  voted  against  the 
same  and  caused  their  votes  to  be  entered  on  the  minutes,  and  had  notified 
the  governor  of  the  state  of  such  infraction  forthwith,  and  had  published 
their  dissent  in  the  nearest  newspaper.  Any  absent  director  to  be  deemed 
to  have  concurred  in  the  action  of  the  board,  unless  he  should  make  his  dis- 
sent known  in  like  manner  within  six  months. 

One-half  of  the  stock  belonged  to  the  state.  The  bank's  principal 
business  was  loaning  its  own  notes,  its  deposits  being  but  a  small 
fraction  of  its  capital. 

We  also  find  under  the  head  of  "Louisiana  Bank  Act  of  1842": 

1.  A  specie  reserve  equal  to  one-third  of  all  its  (the  bank's)  liabilities 
to  the  public. 

2.  The  other  two-thirds  of  its  liabilities  to  be  represented  by  commercial 
paper  having  not  more  than  ninety  days  to  run. 

3.  No  bank  to  pay  out  any  notes  but  its  own. 

4.  All  commercial  paper  to  be  paid  at  maturity,  and  if  not  paid,  or  if  an 
extension  were  asked  for,  the  account  of  the  party  to  be  closed  and  his  name 
sent  to  the  other  banks  as  a  delinquent. 

It  would  take  a  powerful  glass  to  spy  out  a  gallery  of  bankers 
that  would  stand  such  ridiculous  rules  as  those. 

References  warmly  advocating  the  Indiana  and  Louisiana  sys- 
tems by  Horace  White  and  Congressman  Fowler  were  made  at 
New  Orleans  before  the  American  Bankers'  Convention. 

In  all  seriousness:    If  we  were  to  adopt  the  Louisiana  Act  of 

1842  of  compelling  the  keeping  on  hand  of  33^  per  cent,  in  specie 

of  all  liabilities  to  the  public,  the  national  banks  would  hold  to-day — 

More    than $1,600,000,000  specie 

Whereas,  they  hold  say  8  per  cent,  or  about       400,000,000 

The  rigid  Louisiana  Act  would  require  an  additional  $1,200,000,000 
of  coin  reserve.  Under  the  Louisiana,  Indiana,  Iowa,  and  Ohio 
experiences,  which  arc  almost  parallel  as  to  reserves,  we  should  be 
compelled  to  keep  three  to  four  times  as  much  specie  reserve  as  we 
do  now.  Where  would  the  coin  come  from,  and  who  would  retain 
their  national  bank  charter  under  such  rigid  rules  and  many  others 
not  enumerated?     Progress  would   simply  be  throttled. 


334  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

Again,  under  the  Indiana  experience,  the  banks  were  limited  in 
their  aggregate  loans  to  two  and  one-half  times  their  capital.  The 
aggregate  of  loans,  including  other  securities  in  national  banks  to- 
day, is  over  five  and  one-half  times  their  capital. 

Although  distrust,  insufficient  coin,  and  general  wildcat  bank- 
ing drove  home  for  redemption  the  asset  currency  issued  in  these 
isolated  cases,  no  loss  occurred  because  of  over  rigid  regulations, 
excessive  reserves,  and  limitations  of  development.  Those  were 
days  of  the  ox-team  and  not  paralleled  by  twentieth-century  con- 
ditions. 

To  obtain  any  elasticity  whatever,  at  least  one  of  three  condi- 
tions is  necessary:  (i)  Distrust  in  the  mind  of  the  holder  of  a 
note,  thus  hastening  redemption;  (2)  a  compulsory  law  to  drive  it 
home  ;  (3)  a  graded  tax  sufficiently  high  to  make  it  unprofitable 
except  under  stress. 

The  first  head  needs  no  argument.  Greenbacks  are  not  elastic, 
although  redeemable  in  gold,  because  the  element  of  distrust  is 
wanting.  The  second  head,  by  paying  out  only  their  own  notes, 
operates  in  Canada  in  sending  all  currency  home  twelve  times  a 
year,  and  in  Scotland  all  notes  are  redeemed  twenty  times  over  in 
a  year.  Under  like  conditions  in  the  United  States,  with  our 
thousands  of  banks  and  vast  extent  of  territory,  if  the  quantity  of 
such  currency  as  suggested  by  Mr.  Fowler  was  issued,  the  cost  in 
labor,  time  in  transit  both  ways,  expressage,  etc.,  would  entail  an 
expense  to  the  banks  of  millions  of  dollars  annually,  besides  being 
practically  impossible. 

The  new  "asset  currency"  Fowler  bill  contains  these  sections : 

Sec  10.  That,  for  the  purposes  of  this  act,  New  York,  Chicago,  and  San 
Francisco  shall  be  redemption  cities,  and  all  of  the  national  banks  redeeming 
their  notes  at  any  one  of  these  cities  shall  constitute  a  redemption  district, 
and  the  New  York  redemption  district  shall  be  known  as  number  one,  the 
Chicago  redemption  district  as  number  two,  and  the  San  Francisco  redemp- 
tion district  as  number  three. 

Sec.  II.  That  if  any  national  bank  shall  receive  such  circulating  notes 
of  any  other  national  bank  located  outside  of  its  own  district,  it  shall  not  pay 
them  out  over  its  own  counter,  but  shall  forward  them  cither  to  some  bank  in 
the  district  to  which  the  notes  belong,  or  to  some  bank  located  in  the  redemp- 
tion city  of  its  own  district,  and  then  they  shall  be  returned  to  the  bank  is- 
suing them,  or  to  some  bank  in  the  district  to  which  the  bank  issuing  them 
belongs.1 

1  See  House  Bill  No.  16228,  2nd  session  57th  Congress 


BANKING  REFORM  AND  CURRENCY  SECTION  335 

Now  note :  What  a  lovely  occupation  the  tellers  will  have  as- 
sorting out  notes  of  banks  "outside  of  its  own  district,"  especially 
if  they  are  like  present  issues — packing  them  and  expressing 
to  "some  bank  in  the  district  to  which  the  notes  belong"  or  "to 
the  redemption  city  of  its  own  district,"  and  then  they  shall  be 
returned  (by  express  again)  to  the  issuing  bank,  or — I  will  add  to 
the  nearest  and  cheapest  spot  where  they  can  be  got  rid  of,  then 
vice  versa  to  reimburse  banks  for  cash  reserves.  Would  not  this 
process,  with  its  localized  currency,  petty  and  expensive  annoyances, 
pettifogging  at  redemption,  fail  in  its  object — to  wit,  direct  com- 
pulsory redemption?  Wrould  it  not  be  clearly  an  act  of  credit  cur- 
rency inflation?     A  stretched  rubber  with  the  elasticity  gone? 

The  element  of  distrust  doubtless  would  be  small,  because  of 
the  guarantee  fund  and  first  lien  on  assets,  but  that  same  element 
in  times  of  financial  trouble  would  be  deep-seated  with  the  great 
army  of  depositors,  because  of  that  first  lien.  The  depositor  has 
just  as  much  right  to  know  he  has  equal  rights  in  assets  as  that  a 
banker  will  rest  more  sweetly  if  he  knows  his  borrowing  customer 
has  given  no  first  lien  to  another  on  his  assets. 

If  we  prefer  the  noteholder  by  a  first  lien  to  the  depositor  who 
takes  the  dregs,  this  will  surely  be  the  result.  Under  the  present 
law,  for  every  $100,000  of  circulation  issued  $100,000  of  govern- 
ment bonds  are  deposited  to  secure  it.  These  bonds  cannot  be 
spouted  for  any  other  purpose,  and  in  case  of  a  bank  failure  the 
$100,000  circulation  is  fully  cared  for  and  the  premium  on  the 
bonds  is  left  for  the  depositor,  together  with  all  other  assets. 
Under  the  asset-currency  scheme,  in  case  of  failure  of  a  bank,  the 
$100,000,  which  ought  to  be  in  government  bonds  to  care  for  cir- 
culation, is  loaned  on  commercial  paper.  The  1902  report  of  the 
comptroller  of  the  Currency  (pp.  386,  387)  shows  for  banks  that 
have  failed  in  the  past  forty  years  this  result: 

Nominal  assets  at  date  of  suspension $149,554.3" 

Collected    from    assets 77.5-29,651 

Leaving    losses    of $72,024,760 

or  about  48  per  cent,  of  assets.  Ts  it  nol  clear  that  for  every  $100,- 
000  in  commercial  loans  instead  of  in  bonds  tin-  depositors  would 
receive  $48,000  less  in  dividends  than  under  the  bond-secured  plan? 


336   PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

The  third  point  is  the  only  one  that  ought  to  be  considered 
seri<  »usly.  Under  ordinary  conditions,  the  fluctuation  in  the  interest 
rate  should  be  the  barometer  which  ought  to  check  undue  expansion 
and  inspire  conservatism.  Under  fear  of  occasional  extraordinary 
disturbed  conditions,  if  cash  could  be  provided  on  sound  principles 
to  loan  to  all  solvent  parties,  serious  losses  would  doubtless  be 
prevented ;  but  such  cash  should  at  once  by  a  heavy  tax  be  forced 
to  return  to  its  reservoir  as  soon  as  its  work  was  accomplished, 
so  that  no  act  of  inflation  would  result.  Its  operation  should  be 
like  a  water  reservoir,  always  ready  to  put  out  an  incipient  fire  and 
at  once  refill  again.  In  the  panic  of  1873  about  $33,000,000  of 
clearing-house  certificates  were  issued,  and  in  1893  but  $66,000,000. 
Last  fall  the  New  York  Clearing  House  Bank  reserves  were  short 
$23,000,000.  Mr.  Gage  stated  that  that  shortage  compelled  $92,- 
000,000  in  liquidation  of  loans  and  deposits,  the  reserve  being 
one-quarter  of  the  deposits.  If  $23,000,000  to  $66,000,000 
will  put  out  a  severe  fire,  why  do  we  need  $175,000,000, 
as  provided  by  the  Fowler  bill,  as  the  entering  wedge,  and  more 
than  $500,000,000  later  as  the  intoxication  grows  under  the  stimu- 
lus of  soft  money,  as  indicated  by  Mr.  Fowler  in  his  address  at  St. 
Paul  on  July  7,  last?  Let  us  not  forget,  though,  that  under  the 
Fowler  bill  forced  redemption  is  a  farce;  therefore  the  reservoir 
will  likely  be  empty  when  the  fire  grows  warm.  The  proposition 
to  issue  asset  currency  to  the  extent  of  100  per  cent,  of  national 
bank  capital  I  consider  positively  dangerous. 

Right  here  permit  a  suggestion.  It  may  not  be  a  perfect  plan 
in  accomplishing  the  end  sought,  but  no  proposition  yet  offered 
is  perfect : 

1.  A  bill  somewhat  on  the  lines  of  the  Aldrich  measure  ought 
to  be  put  upon  the  statute-books  to  prevent  locking  up  unnecessary 
funds  in  the  United  States  Treasury. 

2.  Legalize  clearing  houses  as  banks  of  issue  on  the  same 
form  as  national-bank  currency,  secured  by  clearing-house  certifi- 
cates issued  on  the  same  plan  as  heretofore,  to  any  bank  in  the 
clearing  house  to  which  the  clearing-house  committee  sees  fit  to 
grant  it.  Five  per  cent,  interest  to  be  charged  from  date  of  issue 
to  date  of  deposit  by  the  borrowing  bank,  of  funds  with  the  United 


BANKING  REFORM  AND  CURRENCY  SECTION  337 

States    Treasurer    to    redeem    its    borrowings,    when    the    clearing- 
house certificates  will  be  canceled  and  securities  returned. 

This  will  permit  not  only  national,  but  state,  private,  or  any 
other  clearing-house  bank,  to  get  advances  in  times  of  financial 
stress.  Country  banks  can  get  advances-  through  their  corre- 
spondents, thus  serving  all  the  banks  of  the  country.  The  conserva- 
tism of  the  clearing-house  committee  will  prevent  unnecessary 
issues,  the  rate  of  interest  will  prevent  inflation,  and  redemption 
will  automatically  take  place  as  soon  as  pressure  for  funds  is  over. 

It  is  a  significant  fact  that  the  Chicago  Clearing  House  has  never 
issued  any  clearing-house  certificates.  An  examination  of  records 
shows  materially  larger  reserves  of  cash  on  hand  and  due  from 
banks,  as  against  New  York  reserves  for  many  years  past,  thus 
clearly  revealing  the  cause.  If  New  York  will  avoid  trouble,  let 
her  keep  adequate  reserves,  reduce  her  paying  interest  rate  on 
balances  when  money  is  easy,  curb  the  stock  jobbers'  demands,  and 
when  country  banks  call  for  their  own  deposits  to  move  crops, 
small  troubles  will  result.  As  Old  World  metropolitan  cities  are 
internal,  New  York  must  look  to  her  laurels,  or  Chicago,  located 
practically  in  the  center  of  the  garden  of  America,  will  capture  the 
prize. 

I  challenge  any  man  to  prove  that  since  1893  there  have  been 
more  than  two  fall  seasons  when  the  money  market  has  been  above 
a  normal  or  reasonable  level,  and  then  speculation  and  not  crop 
movements  were  the  primary  causes  of  trouble.  I  will  specify  these 
causes  later.  The  slight  raise  in  rates  was  generally  appreciated 
after  the  very  low  rates  for  most  of  the  year. 

Do  we  need  more  fiat  money  in  the  United  Stales?  Look 
at  the  table  of  approximate  stocks  of  money,  as  noted  heretofore: 


United  States 
Great  Britain 

France    

Germany 

Russia    

Canada    


Silvrr  ("din 


$670,000,000 
1 1 7,000,000 
420,000,000 
207,000,000 
103,000,000 
>ooo,000 


Uncovered   Paper 


$5<So,ooo,ooo 
1 17,000,000 
1 34, 000,000 
15  j, 000 .000 

None 
50,000.000 


Nearly  all  silver  is  subsidiary  excepl  that  of  France  and  the  United 
States.  Docs  anyone  think,  from  the  foregoing  immense  issues 
aggregating   $1,250,000,000,    which    exceeds    the    combined    stocks 

22 


338  PRACTICAL  TROBLEMS  IN  BANKING  AND  CURRENCY 

oi  silver  and  uncovered  paper  in  Great  Britain,  France,  and  Ger- 
many, that  we  need  more  soft  money  injected  into  our  circulation? 
Never  in  the  history  of  our  country  was  our  credit  system  so  ex- 
panded as  it  is  to-day.  We  do  not  need  additional  I.  O.  U.  or  asset 
currency,  which  only  adds  fuel  to  the  fire  of  speculative  frenzy. 
What  we  need,  if  anything,  is  less  inferior  money  and  more  gold 
for  a  foundation  that  will  stand  through  storm  as  well  as  sunshine. 
Under  natural  economic  laws,  over  $550,000,000  of  gold  has  come 
to  us  in  the  past  five  or  six  years.  More  will  not  undermine,  but 
strengthen  the  foundation.  It  will  come  to  us,  if  we  need  it,  only 
by  keeping  out  cheaper  money,  and  especially  credit  currency  which 
is  not  as  good  as  what  we  now  have.  We  have  ample  assets  with 
which  to  buy  more  gold  in  the  world's  markets,  if  the  natural  needs 
of  commerce  demand  it,  and  we  need  only  some  provision  for  ex- 
traordinary emergencies,  as  noted  under  the  third  clause.  In 
the  emergency  of  the  Barings'  failure  in  Great  Britain  in  1890,  the 
Bank  of  England  borrowed  from  the  Bank  of  France  £3,000,000 
and  from  other  outside  sources  £2,000,000  more.  If  we  keep  our 
credit  unstained  and  unstrained,  the  world  will  lend  to  us  in  need, 
as  we  have  plenty  of  collateral. 

A  late  writer  in  a  New  York  magazine  advocated  asset  cur- 
rency in  the  United  States  to  lower  and  hold  steady  interest  rates, 
in  order  that  New  York  might  wrest  from  London  the  title  of  the 
world's  financial  center.  What  logic !  Great  Britain  has  the  most 
rigid  and  least  elastic  of  all  currency  systems  in  the  world,  but  she 
has  a  metallic  foundation  that  the  world  never  questions.  Her 
surplus  capital  is  invested  the  world  over  and  is  subject  to  her  beck 
at  all  times.  These  are  clearly  the  reasons  why  rates  of  interest  are 
more  steady,  and  her  prestige  would  doubtless  wane  under  credit 
currency  expansion  such  as  we  are  now  discussing. 

Our  friend  Mr.  Fowler  also  advocates  asset  currency  to  lower  the 
rate  of  interest  in  the  United  States.  Rates  of  interest  with  us 
now  are  about  one-half  those  of  thirty  to  forty  years  ago,  and 
every  decade  sees  a  decline  in  rates.  After  carefully  reading  the 
best  authorities  on  political  economy,  I  conclude  that  the  cause  is 
accumulated  surplus  capital,  and  not  running  the  printing-press  in- 
creasing outstanding  I.  O.  U.'s.  Mr.  Fowler  also  says  that  present 
rates  of  interest  for  the  benefit  of  five  million  borrowers  ought  to  be 


BANKING  REFORM  AND  CURRENCY  SECTION  339 

cut  in  two,  but  how  about  the  benefits  to  the  fifteen  million  de- 
positors, the  eighteen  million  holders  of  insurance  policies,  and 
millions  of  other  savings  of  the  people  generally?  The  greatest 
good  to  the  greatest  number  clearly  does  not  require  ruinously  low 
rates  of  interest.  I  challenge  any  man  to  show  me  a  country 
where  a  very  low  interest  rate  prevails  that  can  compare  with  ours 
in  general  prosperity. 

Then  what  is  the  primary  cause  of  trouble?  My  answer  is, 
over-speculation.  Let  me  quote  and  see  what  the  consensus  of 
opinion  is : 

The  Chicago  Economist  of  November  15,  1902,  says,  in  speak- 
ing of  the  New  York  Chamber  of  Commerce  action  on  "currency 
reform" : 

The  present  impulse  in  New  York  comes  from  the  recent  stringency  in 
the  money  market,  the  decline  in  stocks,  and  the  inability  of  the  promoters 
to  bring  out  a  large  number  of  new  issues  that  are  proving  rather  burdensome 
to  them.  After  all,  what  New  York  really  needs  is  an  act  to  reform  human 
nature.  No  amount  of  legislation  respecting  the  currency  will  prevent  the 
human  animal  from  going  too  far  when  he  gets  into  a  speculation.  That 
is  what  is  the  matter  just  now  at  the  financial  center  of  the  United  States. 

From  American  Banker  of  October  n,  1902,  T  quote: 

"It  is  believed."  says  the  London  correspondent  of  the  New  York  Evening 
Post,  who  is  well  informed  "that  the  effect  of  the  New  York  market's  over- 
speculation  and  diversion  of  capital  into  huge  combines  is  still  to  be  felt. 
European  banks  are  clearly  not  willing  to  spare  gold  for  New  York,  and  the 
reason  apparently  is  that  they  think  such  shipments  would  serve  merely  to 
fan  speculation  on  the  stock  exchange.  This  positon  appears  to  have  been 
distinctly  taken  by  the  president  of  the  Imperial  Bank  of  Germany,  who 
declare?,  in  substance,  that  American  financial  interests  are  paying  the  penalty 
of  undue  rashness  in  speculative  activity." 

The  New  York  Financier  of  October  13,  1902.  says: 

Financial  institutions  have  been  more  than  liberal  in  their  support  of  the 
lising  markets,  but  they  recognize  the  fact  that  an  end  must  come  sometime 
to  all  upward  movement?,  and  the  consensus  of  opinion  inclines  to  the  belief 
that  now  i?  the  time  to  put  on  the  brakes.  The  firm  foundations  already  laid 
will  support  legitimate  expansion,  but  they  are  not  able  to  carry  the  top  hi 
tup er structure  which  Wall  Street  has  been  attempting  i«  build  "/  late. 

Bankers  admil   that  presenl    1  arc  too  low.    They   feel  that    their 

plain  duty  from  now  on  i,  )..  increase  them.  'Ih<-  country  ha-  adopted  a 
Dangerous  gait  in  the  lasl  year,  and  the  wisdom  thai  ding  hankers  to 

a  n:irty  to  it   i    to  be  commended.    On  theii   conserva- 
tism rests  the  continuation  <>f  teal   prosperity. 

The  Journal  of  Commerce,  Commercial  and  Financial  Chronicle. 


340    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

and  the  Bankers'  Magazine  of  New  York  have  articles  in  a  similar 
strain. 

In  the  New  York  Evening  Post  of  November  last,  in  the 
American  Bankers'  Convention,  New  Orleans,  special  issue,  I  find: 

The  simple  truth  of  the  matter,  recognized  hy  every  observer  with  his 
eyes  open  and  his  wits  at  work,  is  that  our  promoters  and  speculators  have 
pushed  their  undertaking  beyond  the  limit  where  available  capital  was 
sufficient  to  bear  the  burden.  When  such  a  situation  is  faced  by  any  com- 
munity, the  inevitable  outcome  is  liquidation  of  liabilities.  This  is  the  proc- 
ess now  at  work  upon  the  markets,  and  it  is  the  only  corrective  of  the  situa- 
tion. The  course  of  events,  regarded  from  the  unbiased  view  of  the  economic 
critic,  has  been  as  logical  as  any  in  the  history  of  finance.  The  syndicates 
resorted  indirectly  to  the  American  banks,  to  provide  the  capital  and  hold  the 
securities  until  the  public's  mood  should  change.  The  last  stage  witnessed 
was  the  expansion  of  the  promoters'  demands  beyond  even  the  available 
resources  of  the  domestic  banks  and  the  resort  to  European  lenders  on  an 
unprecedented  scale  to  discount  our  promoting  banker's  notes.  When  the 
foreign  capital  began,  as  it  did  two  months  ago,  to  be  recalled,  the  result 
was   not    in   doubt. 

From  the  Chicago  Banker  for  December  18,  1902,  in  a  well- 
written  article  by  "a  retired  Chicago  banker,"  I  quote  the  follow- 
ing: 

There  is  a  certain  irony  of  fate  in  the  fact  that  we  are  debating  this  ques- 
tion eight-and-fifty  years  after  the  settlement  which  stands  for  the  enlightened 
judgment  of  England's  financiers.  The  directors  of  the  Bank  of  England 
had  the  unlimited  right  to  issue  notes  against  their  portfolio,  until  Peel's  Act 
of  1844  gave  the  Old  Lady  of  Thrcadneedle  Street  the  straight-jacket  she  has 
worn  ever  since.  As  Bagehot  says  in  his  classic  work,  entitled  Lombard  Street, 
this  authority  was,  in  more  than  one  instance,  used  with  the  extremest  unwis- 
dom, so  that  devastating  panics  followed  hard  upon  the  heels  of  the  reckless 
speculation  which  too  great  facilities  for  borrowing  had  engendered. 

W.  R.  Lawson,  writing  to  the  London  Bankers'  Magazine,  said: 

Whoever  else  may  be  to  blame,  the  New  York  banks  did  not  owe  their 
recent  trouble  to  undue  zeal  on  behalf  of  the  trade  of  the  country.  It  was 
not  their  commercial  discounts  that  reduced  their  cash  reserves  below  the 
legal  minimum.  A  specially  bad  feature  of  the  situation  was  that  so  much 
bank  money  had  been  diverted  from  commercial  to  stock  financing. 

In  another  article  he  says : 

Fears  of  there  not  being  money  enough  to  go  around  always  appeal  to 
the  mercantile  imagination,  and  American  bankers  have  for  a  good  many 
years  persistently  harped  on  this  chord.  They  have  not  been  discouraged  by 
the  paradox  that  the  United  States  has  one  of  the  most  copious  currencies 
enjoyed  by  any  country  of  equal  commercial  rank. 

He   laughs    at   our   follies   and   declares   the   "combineers"   are  the 


BANKING  REFORM  AND  CURRENCY  SECTION 


341 


source  of  trouble.  Metropolitan  journals  everywhere  make  similar 
comments.  Does  not  this  compilation  of  opinions,  made  more  than 
six  months  ago,  seem,  in  the  light  of  later  events,  prophetic? 

It  seems  needless  to  quote  further  than  to  say  that  the  notable 
address  of  Frank  A.  Vanderlip,  in  October  last,  at  Wilmington, 
N.  C,  ought  to  ring  the  death-knell  of  any  methods  to  bring  about 
further  inflation,  with  its  resultant  high  prices,  increased  imports, 
decreased  exports,  thus  bringing  about  much  sooner  a  reaction  in 
our  progress,  which  is  as  certain  as  that  history  repeats  itself.  If 
anyone  seeking  truth  will  see  the  hand-writing  on  the  wall,  he 
is  commended  to  read  carefully  the  standard  authorities  on  political 
economy  for  parallel  conditions,  and  the  fogs  of  the  common  error 
as  to  the  cause  of  trouble  would  be  illumined  by  a  clearer  light. 
In  view  of  all  these  facts,  is  our  trouble  lack  of  money,  or  is  it  over- 
speculation? 

Doubtless  some  are  clamoring  for  asset  currency  because  they 
think  there  is  profit  in  it ;  but  as  surely  as  there  is  material  profit 
in  its  issue,  and  it  is  not  confined  to  great  centralized  institutions 
which  are  more  likely  to  be  prudent  in  issuing  it,  there  being  no 
monopoly  in  banking,  the  multiplication  of  banks  would  soon  de- 
stroy such  profits.  I  assert  that  a  national  bank  has  no  more  right 
to  issue  currency  when  its  credit  is  strained,  and  force  it  on  an 
unwilling  public  without  interest  or  penalty,  than  have  state  banks, 
or  a  merchant  or  manufacturer,  under  like  conditions.  It  never 
should  be  done  except  in  emergencies.  In  any  case,  collateral 
should  be  put  up  as  security,  and  a  tax  imposed  high  enough  to 
drive  it  out  of  use  as  soon  as  its  work  is  done.  The  interest  rate  is 
the  check-valve  to  prevent  undue  expansion  and  insure  conserva- 
tism, not  only  in  banking,  but  in  all  commercial  pursuits.  I  assert 
with  confidence  that  no  case  is  extant  to-day  that  compares  with  onr 
subject  under  discussion.  Large  centralized  institutions  only  have 
the  right  anywhere  of  issuing  a  limited  amount  of  asset  currency. 
Germany  is  financially  depressed  to-day  because  of  the  abuse  of  the 
license  accorded  her  great  centralized  bank,  as  heretofore  noted, 
Canada  which  i-  harped  about  so  much,  is  one  of  'he  most  unpro- 
gressive  countrii 

The  early  ox-team  da)   .  when  bullocl    .  wampum,  beads,  skins, 
etc.,  were  legal  tender;    when  collateral  and  gold  were  scarce,  have 


342    PRACTICAL  rROBLEMS  IN  BANKING  AND  CURRENCY 

given  way  to  abundance  of  gold,  plenty  of  collateral,  abundant  pros- 
perity, and  a  confidence  that  has  built  a  colossal  superstructure  of 
credit  unknown  in  ancient  or  modern  times.  Shall  we  build  a 
metallic  foundation  on  which  this  structure  shall  stand,  broad, 
strong,  and  enduring;  or  shall  we  undermine  the  house  we  have 
built  by  piling  credit  on  credit  and  misname  it  "reform"?  O  Re- 
form !  Reform !  What  crimes  are  committed  in  thy  name !  Blow 
up  the  balloon  to  the  limit,  and  then  give  it  another  pull ;  give  the 
rubber  another  stretch  after  it  has  been  drawn  almost  to  the  point 
of  breaking;  take  another  drink  when  the  intoxicated  patient  is 
over-loaded.  No !  No !  Let  us  pour  oil  on  the  troubled  waters, 
put  the  brakes  on  the  over-worked  engine,  put  more  ballast  in  the 
hold,  instead  of  adding  to  the  sails. 

This  country  is  to  be  congratulated  that  in  the  year  1902  no 
asset  currency  was  allowed,  thus  causing  a  check  to  the  wild  and 
reckless  pace  of  the  promoters,  assisted  by  some  over-greedy 
bankers.  Another  safety-valve  was  the  wonderful  prosperity  of 
the  country  as  a  whole,  even  if  we  did  not  have  asset  currency.  If 
banks  could  have  issued  asset  currency,  thus  still  further  inflating 
conditions  under  the  get-rich-quick  fever,  I  fear  results  would 
have  been  somewhat  like  Germany's  1900  experience.  Foreign 
banks  realized  our  condition  and  put  the  brakes  on  by  raising  the 
rates  on  money  so  high  that  further  expansion  was  checked.  The 
interest  rate  should  be  the  corrective  for  all  troubles,  except  oc- 
casional emergencies  which  might  call  for  more  heroic  treatment. 
The  world  is  open  to  us  to  borrow  in  case  of  need,  and  with  quick 
transportation  and  plenty  of  good  collateral,  with  slight  fluctuations 
in  interest  rates,  legitimate  interests  will  rarely  suffer.  An  occasional 
panic  is  inevitable  in  all  progressive  countries.  It  has  its  day,  like 
the  measles  and  the  grip.  Political  economists  of  all  ages  have , 
wrestled  with  the  knotty  elastic  problem  in  the  hope  of  evading 
panics,  but  have  failed.  In  these  latter  days  the  woods  are  full 
of  popular  elastic  nostrums  to  cure  a  case  of  short  cash  to  move 
the  crops,  when  the  true  diagnosis  proves  that  the  common  principles 
of  prudence  have  been  violated,  and  over-speculation  and  exces-f 
sive  promotions  have  run  riot.  The  shock  of  last  fall  has  probably 
sobered    up    the    more    conservative ;     therefore,    as    the     unex- 1 


BANKING  REFORM  AND  CURRENCY  SECTION 


343 


pected  usually  happens,  the  forewarning  will  probably  prevent  a 
repetition  of  the  trouble. 

It  is  to  be  hoped  that  the  bargain  counter  which  has  been  laden 
with  rich  pickings  for  conservative  buyers  with  cash,  in  the  past 
few  months,  has  been  nearly  cleared ;  that  the  undigestible  securities 
will  be  dumped  into  the  sewer,  and  progress  along  conservative 
lines  once  more  be  resumed  with  Anglo-Saxon  energy. 

A  weighty  responsibility  rests  upon  our  American  Bankers' 
Commission,  and  more  with  our  statesmen,  if  this  question  of  asset, 
elastic,  or  emergency  currency  is  to  be  settled  on  sound  and  endur- 
ing lines.  Our  patriotism  ought  to  rise  higher  than  to  settle  this 
momentous  question  with  a  view  to  larger  profits  for  the  banks. 
If  New  York  is  to  become  the  world's  financial  center,  the  quick- 
sands of  asset  currency,  added  to  our  present  oversupply  of  soft 
money,  will  retard  the  day,  on  account  of  loss  of  confidence  in  our 
standard,  and  only  a  gold  foundation  of  international  money  will 
hasten  it.  If  this  countrv  is  to  continue  its  wonderful  onward 
progress,  it  will  not  advance  on  exploded  academic  theories  or 
Populistic  nostrums,  but  on  sound  and  conservative  lines.  I  firmly 
believe,  from  a  careful  survey  of  the  world's  history  on  banking, 
that  asset  currency,  as  a  cure-all  for  economic  troubles,  is  a  fraud, 
a  delusion,  and  a  snare.     The  remedy  is  worse  than  the  disease. 

QUERY 

In  these  days  of  great  accumulation  of  surplus  capital,  as  indicated  by 
low  interest  rates,  expanded  credit  generally,  and  large  per  capita  circulation, 
permit  this  pertinent  query : 

If  a  bank  extends  its  loans  to  the  limit  of  its  assets,  then  swaps  its  I.  O. 
U.'s  without  interest — secured  by  a  first  lien  on  its  assets,  the  depositor  taking 
a  second  mortgage — for  its  customer's  note  at  5  to  6  per  cent,  thus  carrying 
out  the  asset  currency  advocate's  ideas,  does  not  that  act  smell  loudly  of 
"kiting"? 

Confidence  upbuilds,  distrust  paralyzes, 


344 


PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 
PROPOSED  CHANGES  IN  OUR  BANKING  LAWS 


ADDRESS  DELIVERED  BY  CHARLES  G.  DAWES,  EX -COMPTROLLER  OF  THE  CURRENCY, 
AND  PRESIDENT  OF  THE  CENTRAL  TRUST  COMPANY  OF  ILLINOIS,  CHICAGO, 
BEFORE  THE  PENNSYLVANIA  BANKERS'  ASSOCIATION,  AT  PITTSBURG,  SEPTEM- 
BER,   I903. 

The  subject  which  I  propose  to  discuss  under  this  caption  is 
that  of  asset  currency  and  branch  banking,  and  it  is  one  which  has 
agitated  the  bankers  of  the  United  States  for  the  last  eight  years. 
This  question  first  began  to  be  discussed  about  the  time  of  the 
Banking  Association  meeting  at  Baltimore — the  time  when  the  Bal- 
timore plans,  so  called,  were  first  enunciated — and  you  will  remem- 
ber that  at  that  time  these  so-called  plans  for  asset  currency  were 
offered  as  means  primarily  of  governmental  currency  reform.  The 
panic  of  1893  had  exposed  the  inherent  weakness  of  our  govern- 
mental financial  system  as  it  was  at  that  time.  That  inherent  weak- 
ness had  existed  years  before  that,  but  it  took  a  period  of  deficient 
governmental  revenues  to  develop  that  weakness  and  create  public 
sentiment  in  the  United  States  for  its  reform.  A  favorable  general 
public  sentiment  is  always  necessary  in  this  country  of  ours  before 
enacting  long-discussed  legislation  affecting  our  interests. 

The  panic  of  1893  had  developed  a  deficiency  in  governmental 
revenue.     The  expenses  of  the  government  were  greater  than  the 
income  of  the  government.     As  a  consequence,  the  gold  reserve  in 
the  Treasury  of  the  United   States,  upon  the  existence  of  which 
depends  the  interchangeability  of  the  greenbacks  and  other  forms 
of   governmental    credit    currency    into    gold   upon    demand,    was 
encroached  upon   for  the  purpose  of  paying  the  expenses  of  the 
government — governmental  income  not  being  sufficient — and  there 
came  to  be  a  disproportion  between  the  gold  in  the  treasury  and  the 
demand  currency  liabilities  of  the  government.     That  disproportion 
commenced  to  undermine  the  confidence  of  the  people  in  the  stability 
of  our  medium  of  exchange,  and  as  a  measure  of  governmental 
currency  reform  one  of  two  things  had  to  be  done:  either  that  dis- 
proportion had  to  be  lessened  by  decreasing  the  amount  of  currency 
liabilities— in  other  words,  by  retiring  the  greenbacks ;  or  it  had  to 
be  lessened  by  increasing  the  amount  of  gold  in  the  treasury,  allow- 
ing the  currency  liabilities  to  remain  as  they  were.     Now,  those  who 
were  in  favor  of  asset  bank-notes  were  in  favor  of  retiring  $346,- 


BANKING  REFORM  AND  CURRENCY  SECTION  345 

000,000  of  greenbacks  of  the  government  which  were  in  circulation, 
and,  for  the  purpose  of  filling  the  vacuum  in  the  general  circulation 
to  be  thus  caused  by  the  retirement  of  the  greenbacks,  they  urged 
the  provision  for  these  notes.  The  government,  however,  did  not 
take  that  means  of  currency  reform.  Under  the  law  of  March  14, 
1900,  the  gold  in  the  treasury  was  "stored  up"  and  properly  pro- 
tected against  periods  of  deficient  governmental  revenues.  Con- 
fidence was  restored  in  the  stability  of  our  governmental  credit  cur- 
rency, which  depends  for  its  value  just  as  much  upon  its  exchange- 
ability into  gold  at  the  Treasury  upon  demand,  as  a  check  against 
any  deposit  depends  for  its  value  upon  its  exchangeability  into 
money,  or  into  another  form  of  credit  equally  as  good  as  money,  at 
your  bank.  Therefore  there  does  not  at  this  time  exist  any  excuse, 
so  far  as  a  governmental  necessity  is  concerned,  for  these  asset  notes, 
which  at  that  time  were  advocated  as  chiefly  important  because  with 
their  aid  we  could  cancel  the  greenbacks  and  shift  the  burden  of 
gold  redemption  of  a  portion  of  the  credit  circulation  of  the  country 
upon  the  shoulders  of  the  banks.  We  have,  however,  since  the  pas- 
sage of  the  law  of  1900,  heard  this  argument  for  asset  notes,  and 
some  reasons  for  it  exist  now  as  then,  and  are  most  important.  But 
they  are  based  upon  the  needs  of  the  business  community  as  distin- 
guished from  the  governmental  needs. 

It  is  proposed  under  these  plans — I  think  we  are  all  familiar 
with  them— to  relieve  the  banks  of  the  United  States  from  the  neces- 
sity of  depositing  government  bonds  as  a  condition  precedent  to  the 
issuing  of  bank-notes,  and  to  allow  them  to  issue  these  notes  against 
their  assets ;  the  notes  to  be  secured  by  a  redemption  fund  of  5  per 
cent.,  as  under  our  present  system,  and  that  redemption  fund  to  be 
kept  replenished  by  a  limited  tax  upon  the  issues  of  such  national 
banks  as  choose  to  issue  the  notes.  Then,  in  the  case  of  the  failure 
of  any  particular  bank  which  has  issued  these  notes,  there  is  to  be  a 
first  lien  upon  the  assets  of  the  failing  bank  for  the  benefil  of  the 
noteholders  of  the  bank,  as  distinguished  from  the  deposil  creditors 
of  the  bank.  And  it  has  been  estimated  that,  if  the  national  banks 
of  the  United  States  had,  since  the  establishment  of  thi  tern, 
issued  the  notes  which  arc  in  circulation  now,  an  1  had  not  bad  any 
government  bonds  upon  deposit   with  the  Treasury  of  the  United 


346    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

States  as  security,  the  tax  necessary  to  be  levied  to  have  redeemed 
all  notes  in  full  would  have  been  a  very  small  one. 

Now,  in  considering  this  argument,  I  want  to  call  your  attention 
to  one  or  two  things,  lest  we  be  misled  by  these  figures.  In  the  first 
place,  this  system  of  note  issues,  which  it  is  proposed  to  authorize 
by  law,  is  an  optional  system  of  bank-note  issue.  It  is  not  neces- 
sary, under  this  proposed  law,  for  a  national  bank  to  issue  these 
asset  notes  unless  it  desires  to  issue  them.  That  being  the  case, 
it  is  very  difficult  for  us  to  make  an  estimate  of  the  amount  of 
tax  upon  these  issues  which  will  be  necessary  to  make  the  notes 
safe,  based  upon  the  experience  of  the  national  banking  system ; 
for  we  do  not  know  how  many  of  the  5,000  national  banks  in 
the  country  will  choose  to  issue  these  notes.  If  only  a  few  hundred 
of  the  weaker  banks  should  choose  to  issue  the  notes,  the  tax 
should  not  and  would  not  be  estimated  the  same  as  if  one  thou- 
sand strong  banks  chose  to  issue  the  notes.  If  a  thousand  banks 
chose  to  issue  the  notes,  the  tax  should  not  be  the  same  as  if 
four  thousand  banks  issued  the  notes.  But  we  do  not  know  how 
many  national  banks  will  avail  themselves  of  this  privilege  of  issu- 
ing uncovered  currency,  and  yet  that  tax,  levied  for  the  purpose  of 
making  these  notes  safe,  is  a  limited  one — a  tax  which  thus  limits 
the  liability  of  each  one  of  the  issuing  banks  for  the  notes  of  another 
bank. 

Again,  we  do  not  know  what  the  national  system  will  be  if  the 
banks  of  the  United  States  are  given  the  privilege  of  issuing 
uncovered  currency.  Mr.  C.  C.  Hay,  of  the  American  Banker,  told 
me  that  the  record  collected  by  this  magazine  showed  that  at  this 
time  there  were  17,635  banks  in  the  United  States,  of  which  about 
5,000  were  national  banks,  and  over  12,000  banks  were  outside  the 
national  system.  The  bulk  of  those  outside  the  national  system  are 
small  banks,  and  the  greater  part  of  them  eligible  through  conver- 
sion to  come  into  the  national  system.  Now,  if  they  should  come 
into  the  national  banking  system  for  the  purpose  of  availing  them- 
selves of  the  privilege  of  issuing  uncovered  currency,  how  do  we 
know  what  the  national  banking  system  will  be? 

Why,  with  this  chance  of  difference  in  the  condition  of  the 
banking  system  to  which  the  proposed  law  applies,  should  this  tax 
be  thus  limited  ?     Simply  because  the  framers  of  this  bill  know  that, 


BANKING  REFORM  AND  CURRENCY  SECTION 


347 


unless  that  tax  is  limited,  the  stronger  banks  will  not  issue  the  cur- 
rency. The  stronger  banks  of  the  United  States  are  not  going  to 
undertake  to  guarantee  and  be  responsible  for  the  issues  of  the 
weaker  banks.  But  what  moral  light  have  we,  by  limiting  the  tax, 
to  put  a  risk  upon  the  community,  whose  bank-notes  are  now  safe, 
which  the  banks  themselves  are  not  willing  to  take  for  the  purpose 
of  securing  the  profits  incident  to  the  issue  of  these  notes?  I  am 
very  well  prepared  to  admit  that,  provided  there  is  a  first  lien  in 
favor  of  the  note-holding  creditors  as  against  the  deposit-holding 
creditors  of  a  bank,  a  limited  tax  is  sufficient  to  make  the  notes  safe ; 
but  my  contention  is  that  a  first  lien  in  the  case  of  uncovered  notes, 
as  distinguished  from  the  present  bond-protected  bank-notes  of  the 
country,  is  unfair  and  unjust  to  the  deposit-holding  creditors  of  the 
country ;  and,  in  addition  to  that,  if,  under  this  proposed  system,  this 
first  lien  is  allowed,  the  business  of  the  country  will  be  greatly 
injured  by  the  lack  of  confidence  which  such  a  system  will  tend  to 
create  in  the  minds  of  the  deposit-holding  classes  as  a  whole. 

Right  here — for  I  want  to  emphasize  the  importance  of  this  argu- 
ment against  a  first  lien  for  noteholders — let  me  speak  of  what  the 
chief  function  of  a  bank  is.     The  chief  function  of  a  bank  in  any 
community  of  this  country  is  not  the  note-issuing  function.     The 
note-issuing  function  in  the  most  of  the  great  continental  banks  is 
the  chief  function  of  the  bank,  or  of  very  much  more  importance, 
at  least,  than  the  note-issuing  function  of  the  banks  in  this  country. 
The  great  function  of  the  banks  in  this  country  is  the  production  of 
purchasing  power.     A   depositor  leaves  $1,000  with  the  bank  and 
receives  credit  for  it.     At  the  same  time,  under  the  rules  of  bank- 
ing, the  bank  can  loan  $750  of  this  $1,000  in  the  shape  of  credit  upon 
its  books  to  another  customer,  thus  increasing  the  purchasing  power 
of  the  community  by  75  per  cent,  of  the  original  deposit.     And  so, 
in  this  country,   under  the  normal  and  ordinary  operations  of  the 
banking  system,  there  has  been  built  up  in  the  brinks  a  magnificent 
deposit  credit  to  the  people  of  the  United   States.     There  is  now 
on  deposil   in  solvenl  banks  of  the  United  States  over  nine  billions 
of  dollars,  the  bull;  of  which  i-  subject  to  check;  and  yel  (he  entire 
outstanding  circulation  of  gold  and  silver  and  paper  of  tin-  Unil 

Stal  is  only  aboul   $2  ■" 1    or  about    55  per 

cent,  of  that  sum.     Now,  it  is  through  cl  and  drafts  dra\ 


348    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

against  that  magnificent  deposit  balance  that  90  per  cent,  of  the 
business  of  the  United  States  is  done,  and  it  is  not  at  this  time  a 
matter  of  so  much  importance  as  to  whether  this  comparatively- 
unimportant  function  of  issuing  notes  is  changed.  The  important 
thing  to  consider  is  what  we  are  going  to  do  in  connection  with  any 
change  in  the  form  of  this  comparatively  unimportant  function  of 
issuing  notes  to  endanger  the  confidence  of  the  people  in  the  safety 
of  this  magnificent  deposit  credit.  For  when  you  commence  to 
endanger  the  confidence  of  the  people  in  that  deposit  balance,  when 
you  frighten,  in  any  degree,  .the  deposit-holders,  then  is  the  time  that 
we  are  face  to  face  with  all  the  trouble  incident  to  panics — with  all 
the  trouble  incident  to  contraction.  That  is  the  great  question  in 
the  discussion  of  these  plans  for  asset  notes.  Do  not  endanger  this 
prosperity  which  we  have  built  up  at  so  much  cost  in  this  country 
to-day,  by  doing  anything  which  tends  to  lessen  the  confidence  of  the 
public  in  the  great  credit  balances  upon  deposit  in  the  banks  of  the 
United  States. 

Now,  let  us  see  how  the  first  lien — coming  back  to  that — may 
do  it.  It  is  undoubtedly  true  that,  if  all  the  losses  which  would  have 
accrued  in  the  past  to  holders  of  national-bank  notes,  if  there  had 
been  no  United  States  bonds  as  security  for  them,  were  apportioned 
over  the  entire  amount  of  deposits  in  the  country,  the  percentage  of 
loss  would  have  been  a  very  small  one.  But  losses  upon  these  notes 
would  not  be  apportioned  over  all  deposits.  This  first  lien  localizes 
losses.  It  means  that  in  any  community,  should  a  bank  fail,  the  loss 
of  the  deposit-holding  creditors,  through  that  issuance  of  asset  notes, 
would  not  be  the  proportion  that  the  loss  in  that  particular  bank 
would  bear  to  the  total  losses  under  the  entire  system.  It  means 
that  all  the  loss  upon  the  notes  of  that  particular  bank  must  come 
out  of  that  particular  set  of  depositors.  Now,  there  would  be  a 
very  great  difference  in  the  effect  of  those  localized  losses  upon  the 
confidence  of  the  people  in  the  safety  of  deposit  balances,  and  the 
effect  if  that  loss  could  be  fairly  apportioned  and  distributed.  And 
under  any  of  those  plans,  if  we  take  as  far  as  we  safely  can  the 
experience  of  the  national  banking  system  as  a  guide,  it  will,  I  think, 
be  seen  that  by  giving  a  first  lien  for  the  benefit  of  asset-note  holders 
as  distinguished  from  deposit-holders,  the  percentage  of  their  claims 
which  deposit-holders  in  an  insolvent  bank  will  then  receive  will  be 


BANKING  REFORM  AND  CURRENCY  SECTION  349 

very  greatly  decreased — decreased,  in  my  judgment,  to  such  an 
extent  that,  after  a  series  of  these  failures  have  occurred,  especially 
in  times  of  a  panic,  the  public  will  come  to  appreciate  the  possibility 
of  the  severe  losses  which  this  first  lien  will  inflict  on  them.  Thus, 
by  authorizing  the  issue  of  these  uncovered  notes  with  a  first-lien 
provision,  we  shall  lessen  the  amount  of  the  deposit  balances  of  the 
United  States,  and  by  lessening  the  confidence  of  the  public  of  the 
United  States  in  the  banks  as  the  proper  custodians  for  their  funds, 
we  shall  inflict  the  greatest  damage  upon  our  commerce  and  industry 
and  prosperity. 

Now,  a  first  lien  is  inherently  a  moral  wrong.  There  is  no 
inherent  moral  right  about  it.  The  money  of  the  deposit-holding 
creditors  of  a  bank  has  gone  into  the  assets  of  the  bank  side  by  side 
with  the  money  of  the  note-holding  creditors,  and  when  that  bank 
fails  we  have  no  inherent  moral  right  to  say  to  the  deposit-holding 
creditor :  "Your  dollar  shall  not  be  paid  until  and  unless  the  dollar 
of  the  noteholder  is  paid  in  full."  As  I  say,  there  is  no  inherent 
moral  right  about  it.  The  contention  is  that  a  public  necessity 
exists  for  a  different  kind  of  bank  circulation  from  that  in  use  at 
present ;  that  in  that  public  necessity  for  a  different  kind  of  circula- 
tion can  be  found  justification  for  the  moral  wrong  of  a  first  lien. 
But  my  contention  is  that  there  is  no  such  public  necessity  at  this 
time  in  the  United  States  as  will  justify  that  wrong.  It  is  no  argu- 
ment to  say  that  a  noteholder  possibly  lives  at  a  distance  from  the 
bank,  and  for  that  reason  he  has  not  the  chance  to  determine  the 
standing  of  the  bank  that  the  deposit-holder  has,  who  does  his  busi- 
ness in  closer  contact  with  the  bank.  That  is  no  ground  which  can 
be  claimed  as  a  justification  for  the  great  injustice  to  be  done  in  the 
proposed  distribution  of  the  assets  of  an  insolvent  bank.  As  a 
matter  of  fact,  the  trustworthiness  of  banks  is  not  a  matter,  from 
the  very  nature  of  things,  with  which  depositors  can  easily  acquaint 
themselves;  not  even  the  stockholders  in  a  bank  know  very  much 
■!  the  hills  r<  le  of  their  particular  hank.     A  hank,  to  be 

successful,  cannot  publish  its  own  business  and  the  business  of  its 
customers  to  the  world.  The  question  of  trustworthiness  is  left  by 
the  depositor  to  the  bank  examit  representatives  of  the  govern- 

ment, and  cannot  he  determined  by  a  patron  of  .1  hank  as  a  rule — 
there  are  exceptions,  but  not  as  a  rule ;  and  this  is  not  a  reason  which 


350  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

justifies  this  radically  and  fundamentally  different  treatment  in  the 
two  classes  of  creditors,  to  say  that  the  noteholder  is  at  a  distance 
and  therefore  must  be  protected  in  preference  to  the  depositor  who 
is  nearer.  As  a  matter  of  fact,  a  deposit  creditor  of  necessity  must 
often  trust  banks  at  a  distance. 

And  this  first  lien,  which  is  worshiped  as  a  sort  of  fetish  by 
currency  orators — this  first  lien  provision  is  an  exception  in  the  cur- 
rency systems  of  the  world.  If  one  listens  to  the  speeches  of  these 
so-called  reformers  at  this  time,  he  would  imagine  that  a  first  lien  is 
something  vitally  necessary.  There  are  only  two  countries  in  which 
the  first  lien  exists,  so  far  as  I  understand.  It  does  not  exist  in 
France,  England,  or  Germany.  It  exists  in  Canada — an  unqualified 
first  lien — and  in  Canada,  in  the  future,  is  to  be  seen  the  first  test  in 
times  of  business  adversity  of  the  value  of  uncovered  asset  currency 
subject  only  to  a  nominal  tax.  In  this  country  we  have  a  qualified 
first  lien,  and  what  qualifies  the  first  lien  is  the  fact  that  an  unshrink- 
able asset  has  to  be  deposited  with  the  treasury  of  the  United  States 
before  the  notes  can  be  issued.  In  other  words,  the  proceeds  of 
those  notes  are  invested  in  unshrinkable  assets ;  so  as  a  matter  of 
experience,  it  has  been  demonstrated  that  the  lien  has  not  worked 
to  the  injustice  of  the  deposit-holding  creditors.  But  how  would 
it  have  been  under  our  system  if  that  qualification,  if  that  condition, 
had  not  existed  ?  Under  the  present  system  of  note  issues,  the  pro- 
ceeds of  the  notes  are  invested  in  an  unshrinkable  asset,  to  wit, 
United  States  government  bonds.  Under  the  proposed  system  the 
notes  will  be  invested  in  commercial  assets,  upon  which,  in  the  case 
of  an  insolvent  bank,  there  is,  of  course,  a  shrinkage.  Under  the 
asset  plans,  not  only  must  the  depositor  sustain  a  percentage  of  loss 
upon  which  his  own  money  has  been  invested,  but  an  additional  loss 
of  the  same  percentage  upon  the  assets  in  which  the  noteholders' 
money  is  invested.  Experience  has  demonstrated  that  there  is 
practically  no  shrinkage  in  government  bonds,  and  that  therefore, 
as  a  matter  of  fact,  under  the  present  system,  the  first-lien  feature 
has  not  operated  to  the  loss  of  the  depositor  as  it  would  under  the 
asset  system.  As  I  have  said  before,  the  first  lien  is  bound  to  local- 
ize the  losses  on  currency,  and  that  localization  of  severe  losses  is 
one  of  the  most  dangerous  features  of  this  first-lien  provision.  I 
maintain  that  a  first  lien,  unless  the  deposit-holding  creditor  is  pro- 


BANKING  REFORM  AND  CURRENCY  SECTION 


351 


tected  first  by  a  requirement  that  an  unshrinkable  asset  as  security 
for  bank-notes  be  deposited  with  an  impartial  trustee  to  protect  him 
against  losses  made  through  bad  investments  of  the  notes,  is  a  fea- 
ture which  would  cause  lack  of  confidence  in  the  banks  of  this  coun- 
try, and  cause  a  decrease  in  the  deposit  balances,  and  thus  tend  to 
bring  about  financial  straits;  for,  as  I  have  said  before,  the  confi- 
dence of  the  people  of  the  United  States  in  the  banks  of  the  country 
is  a  most  important  thing  to  consider,  and  much  more  important 
than  a  change  in  our  form  of  bank  currency  at  this  time. 

I  have  made  my  speech  thus  far  from  the  standpoint  of  an 
opponent  of  the  present  plans  for  reforms  in  our  bank  currency 
which  are  offered  to  the  people.  I  believe  in  reform  in  bank  cur- 
rency, but  I  do  not  believe  that  these  particular  plans  offered  to  us 
at  this  time  are  safe.  We  can.  however,  both  secure  reform  and  at 
the  same  time  be  safe.  I  admit  that  we  need  additional  elasticity  in 
our  currency,  but  I  believe  that  elasticity  must  not  be  obtained  at 
the  expense  of  the  solidity  and  safety  of  the  medium  of  exchange, 
in  which  the  business  of  this  country  is  done.  We  need  elasticity 
a  great  deal  more  in  times  of  a  panic  than  in  the  fall  when  the  crops 
are  to  be  moved.  A  panic  in  this  or  in  any  other  country  comes 
about  so  often,  and  we  cannot  avoid  it.  It  comes  through  the 
ordinary  and  simple  results  of  ordinary  and  simple  business.  In 
any  country  where  the  credit  system  is  in  effect  as  here,  panics  will 
corrte.  A  man  makes  a  purchase  of  a  piece  of  property  for  $5,000. 
We  will  say  he  sells  it  for  $10,000,  and  takes  $5,000  in  cash  and  a 
note  for  the  other  $5,000.  The  price  of  real  estate  rising,  that  man 
sells  it  for  $15,000,  and  takes  $5,000  cash,  and  $5,000  in  a  note  pay- 
able in  one  year,  and  another  note  of  $5,000  payable  in  two  years ; 
and  so  on,  increasing  in  proportion  to  cash.  Not  only  in  the  real- 
estate  business,  but  in  all  business,  the  credits  of  a  country  grow  out 
of  proportion  to  the  cash  in  which  those  credits  are  redeemable,  and 
sometimes  hastened  by  speculation;  but  whether  hastened  or  not, 
the  time  is  sure  to  come  when  credits  get  out  of  proper  proportion 
to  the  cash  in  existence  in  which  credits  are  redeemable.  By  and 
by  there  exists  a  great  disproportion  between  the  credits  of  a  coun- 
try and  the  ca  h  in  which  they  arc  redeemable.  Some  brighl  man 
sees  it,  and  calls  for  paymenl  of  his  note;  another  sees  it  and  calls 
in  his  note;  a  number  of  men  see  it,  and  call  for  their  notes,  and  a 


35-' 


PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 


general  feeling  of  unrest  and  disquietude  is  developed ;  and  sud- 
denly you  have  frightened  the  greatest  creditor  class  we  have  ever 
known,  the  depositors  in  the  17,000  banks  of  the  country,  and  they 
become  alarmed  and  call  for  their  credit — the  credit  due  them  in  the 
shape  of  deposit  balances  from  the  banks ;  and  suddenly  we  are 
face  to  face  with  all  the  disasters  and  all  the  troubles  which  are 
incident  to  what  we  call  a  financial  panic. 

We  have  a  panic  about  every  twenty  years  in  this  country. 
There  was  the  panic  of  1817-18;  the  panic  of  1837;  the  panic  of 
1857;  the  panic  of  1875,  hastened  out  of  its  time,  perhaps,  by  the 
inflation  incident  to  the  Civil  War;  there  was  the  panic  of  1893; 
there  is  the  panic  which  is  off  in  the  future.  We  cannot  stop  finan- 
cial panics ;  but  if  it  were  possible  for  us  to  evolve  a  plan  for  some 
sort  of  an  emergency  currency  which  would  help  the  banks  of  the 
United  States  to  tide  over  that  period  of  tremendous  demand  for 
cancellation  of  deposit  balances,  we  should  have  taken  a  great  step 
forward  in  this  matter  of  currency  reform,  and,  in  my  judgment, 
the  only  practical  step  at  this  time  toward  the  solution  of  these 
problems.  The  period  of  acute  monetary  demand  is  not  long. 
The  very  height  and  climax  of  the  panic  of  1893  was  reached  in 
May,  when  it  was  impossible  on  certain  days  to  borrow  money  upon 
government  bonds,  I  am  told,  in  New  York  City.  Yet  in  October, 
1893,  six  months  after  that  period  of  acute  demand,  there  was  the 
largest  collection  of  idle  and  unloanable  funds  in  the  banks  of  the 
United  States  which  there  had  ever  been  since  the  foundation  of 
our  monetary  system.  The  demand  for  more  money  at  that  time 
is  short,  not  long.  From  the  effects  of  a  panic,  of  course,  the  coun- 
try is  years  in  recovering.  It  was  five  or  six  years  after  the  panic 
of  1873  before  stagnated  industries  commenced  to  revive.  It  was 
in  1898,  five  years  after  the  panic  of  1893,  before  this  present  period 
of  great  prosperity  could  be  considered  as  fully  started.  But  the 
acute  demand  for  money — and  a  panic  always  arises  out  of  a  demand 
for  sudden  cancellation  of  debt — is  for  a  period  of  but  a  short  time. 
Now,  can  we  find  some  method  of  issuing  in  time  of  panic  additional 
bank  credit  in  the  shape  of  uncovered  currency,  because  all  asset 
currency  is  a  form  of  banking  credits,  and  a  provision  for  asset  notes 
at  this  time — mistake  it  not — is  an  argument  in  favor  of  allowing 
additional  use  of  bank  credits?     An  asset  note  is  a  form  of  banking 


BANKING  REFORM  AND  CURRENCY  SECTION  353 

credit,  and  it  is  a  form  of  which  the  people  will  use  only  so  much. 
Can  we  devise  some  method  which  at  the  time  of  a  panic  will  allow 
the  issuing  of  a  small  amount  of  additional  bank  credit  without 
endangering  the  confidence  of  depositors  in  their  deposits,  and  with- 
out the  necessity  of  an  unjust  and  wrong  and  demoralizing  first 
lien  in  favor  of  uncovered  asset-note  holders?  Any  asset  notes  are 
a  form  of  bank  credit,  and  there  is  a  limit  to  the  amount  of  credit 
with  which  a  business  community  can  be  saturated;  and  just  in 
proportion  as  you  saturate,  in  normal  times,  like  the  present,  a 
community  with  bank  credits  in  the  shape  of  asset  notes  subject  only 
to  a  small  tax,  you  will  lessen  the  ability  of  the  banks  to  issue  these 
notes  in  times  of  a  panic. 

Let  us  illustrate  this  point  from  this  much-talked-of  system  in 
Canada.  They  have  this  asset-note  system.  To  be  sure,  they  can- 
not have  any  4,500  or  5,000  banks  to  which  to  apply  it.  They  have 
some  thirty-eight  centralized  banks  with  branches  to  apply  it  to. 
There  is  a  fundamental  and  radical  difference  between  the  two  sys- 
tems. Let  us  see  in  what  condition  they  now  find  themselves  with 
their  asset  currency.  On  March  30  the  deposits  in  the  Canadian 
banks  amounted  to  about  $418,000,000.  Their  banking  capital 
amounted  to  about  $73,000,000.  The  note  issues  at  that  time  were 
about  $58,000,000;  their  cash  resources  about  $80,000,000 — I  have 
not  figured  it  exactly — or  about  18  per  cent,  of  their  deposits  and 
note  liability.  They  are  allowed  under  the  law  to  take  out  these 
asset  notes  up  to  the  extent  of  the  capital  of  the  banks.  In  other 
words,  they  have  been  authorized  to  put  all  the  notes  they  can  into 
circulation  up  to  the  extent  of  their  capital,  and  they  have  been  able 
thus  far  to  get  out  $58,000,000.  The  time  for  the  supreme  test,  the 
crisis  for  Canada,  the  time  for  the  true  test  of  her  asset  currency 
system,  is  yet  ahead  of  her  and  not  behind  her.  When  the  panic 
comes  it  will  be  seen  whether  the  elasticity  of  her  currency  system  is 
sufficient  to  carry  her  through.  The  deposits  of  Canada  are  con- 
stantly increasing,  and  the  uncovered  note  circulation  <>f  Canada  is 
constantly  increasing.  Motes  arc  kept  afloat  by  the  hanks  for  the 
sake  of  the  profit  there  is  in  it  in  these  normal  times.  The  elasticity 
of  their  currency  is  more  like  wet  leather,  which  stretches  principally 
one  way,  than  like  rubber,  which  contracts  and  expands.  Now, 
what  help  will  Canada  gel  during  the  next  panic  from  this  asset 
23 


354  -PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

circulation  ?  Since  her  banks  have  already  issued  about  $58,000,000 
out  of  an  authorized  issue  of  $73,000,000  bank  notes,  they  can  take 
out  only  an  additional  $15,000,000  in  notes.  That  is  less  than  5 
per  cent,  of  the  combined  deposit  and  note  liabilities  of  the  banks. 
Surely  these  asset  notes  will  be  more  of  a  menace  than  a  help  to  the 
Canadian  banks  in  the  next  panic. 

If  Canada,  with  its  lesser  business,  and  with  its  greater  facilities 
for  the  redemption  of  asset  notes,  can  keep  in  circulation  $58,000,- 
000,  or  about  80  per  cent,  of  their  capital — can  keep  that  amount 
afloat  in  the  shape  of  asset  notes — how  much  easier  would  it  be  for 
5,000  national  banks  in  the  United  States  to  keep  25  per  cent,  of  their 
capital  in  asset  notes  afloat !  We  shall  not  have  an  elastic  currency 
under  the  Fowler  bill  to  the  extent  of  25  per  cent,  of  the  capital  of 
the  banks  of  the  United  States,  for  these  notes  could  be  kept  afloat 
in  normal  times  for  the  purpose  of  profit,  and  it  is  nonsense  to  talk 
of  them,  if  issued  under  nominal  taxation,  as  being  of  any  material 
assistance  in  times  of  a  panic.  You  would,  under  the  Fowler  bill, 
be  increasing  the  credits  of  the  country  at  a  time  when  we  do  not 
want  increased  credits.  This  is  the  time,  above  all  others,  to  take 
in  sail,  not  to  put  it  out;  and  if  we  are  influenced  by  arguments 
about  the  necessity  for  more  bank  currency,  we  must  be  very  sure 
that  the  new  bank-notes  are  so  guarded  and  so  protected  that  they 
do  not  add  to  the  danger  which  now  confronts  us,  of  too  much 
extended  credit,  of  too  much  speculation.  In  other  words,  we  do 
not  want  at  this  particular  time  more  credit  money.  We  do  not 
want  an  asset  currency  which  will  go  out  into  business  and  be  a 
foundation  of  still  more  business  credits  as  well  as  being  a  credit 
in  itself.  We  want  some  sort  of  a  currency  which  can  come  out  in 
panics,  which  can  be  used  at  such  times  to  carry  us  through ;  and 
not  a  currency  which  will  help  us  into  a  panic  while  we  are  out  of 
one.  The  crying  need  of  the  day  is  some  sort  of  a  currency  which 
can  be  used,  not  as  an  instrument  of  speculation  and  profit  at  the 
present  time,  but  which  will  help  tide  us  over  in  time  of  financial 
need.  The  bankers  are  just  as  anxious  as  all  other  good  citizens  for 
any  change  in  the  currency  system  which  will  tend  to  make  it  more 
safe,  and  they  stand,  in  my  judgment,  for  only  those  reforms  which 
will  be  good  for  the  community  as  a  whole;  and  this  question  of 
profit  incident  to  a  small  expansion  in  the  credit  facilities  of  the 


BANKING  REFORM  AND  CURRENCY  SECTION  355 

banks  is  one  that  nobody  considers  of  special  importance  except  in 
its  economic  effect  upon  the  country  as  a  whole.  It  is  a  time  when 
we  should  provide  for  trouble  ahead,  not  lay  the  foundation  for  it. 
Therefore  let  us  favor  a  small  issue  of  asset  notes  subject  to  a  high 
restrictive  tax  of  4  or  5  per  cent. — a  tax  high  enough  to  provide  for 
their  redemption  without  the  necessity  of  a  first  lien,  and  high  enough 
to  prevent  their  use  as  an  instrument  of  current  profit  in  normal 
times,  thus  preserving  them  for  use  in  times  of  panics  and  financial 
emergency.  This  is  the  most  practical  step  for  us  to  take  at  this 
time. 

I  hear  it  said  that  we  conservatives  are  becoming  educated,  by 
degrees,  to  the  ideas  of  some  of  those  who  have  been  preaching  to 
us  so  long  and  so  radically  on  the  subject  of  branch  banking  and 
asset  currency.  In  my  judgment,  the  education  is  in  the  other 
direction.  If  you  compare  the  McCleary  bill,  Secretary  Gage's 
first  bill,  and  other  bills  gotten  out  by  some  other  gentlemen  a  few 
years  ago,  with  the  plan  for  asset  currency  as  it  exists  at  present, 
you  will  see  a  marked  progression  on  the  part  of  the  so-called  cur- 
rency reformers  to  the  standard  which  has  been  the  standard  upheld 
by  the  conservatives  for  several  years,  and  not  a  progression  of  the 
conservatives  toward  the  more  radical  ideas  of  the  so-called  cur- 
rency reformers.  If  we  could  have  an  emergency  circulation,  sub- 
ject to  a  high  tax,  to  be  used  in  times  of  a  panic,  and  not  to  be 
used  as  an  instrument  of  currency,  profit,  or  speculation,  we  should 
advance  in  the  right  direction.  This  currency  would  come  out  for 
the  general  good,  as  well  as  for  the  good  of  the  banks,  and  help 
tide  over  panic  periods.  It  is  no  new  plan,  and  there  is  nothing 
original  about  it.  We  have  the  experience  of  the  world  to  guide  us. 
They  already  have  a  system  of  repressive  bank  currency  tax  in 
Germany.  This  tax,  of  necessity,  must  be  so  high  as  to  provide 
without  question  for  the  redemption  of  the  notes  fur  the  short  time 
they  are  in  circulation,  without  necessitating  an  unjust  prior  lien  of 
the  noteholder  over  the  deposit-holder,  and,  when  the  need  should 
be  at  an  end,  will  force  them  into  retirement  again.  And  for  that 
reform,  ii  seems  to  me,  we  can  safely  stand.  It  is  unwise  to  talk 
of  joining  the  branch-banking  question    in   the  di  on  of   asset 

notes. 

We  have  a  great  country,    with  diversified  conditions  and   CUS- 


356    PRACTICAL  PROKLKMS  IN  RANKING  AND  CURRENCY 

toms.  We  want  at  this  time  something  to  go  into  law  to  help  us, 
and  we  know  there  is  no  chance  at  this  time  of  a  branch-banking 
law.  Let  us  stand  behind  some  one  simple  step.  Let  us  combine 
and  stand  behind  some  simple  step  in  advance.  We  do  not  have 
to-day  any  single  man  with  the  influence  in  financial  discussion  that 
Hamilton  had  in  his  day.  The  great  men  of  to-day  have  not  to  such 
an  extent  the  centralized  confidence  of  the  people  of  the  United 
States.  This  is  such  a  large  country  now.  In  Hamilton's  time  the 
country  was  new,  everything  was  new,  all  departments  were  being 
founded  then,  and  great  men  could,  comparatively  unhampered  and 
unhindered,  force  into  law  their  fundamental  systems.  To-day  we 
have  so  many  men  in  the  country  who  are  financiers,  there  are  so 
many  different  views  and  such  a  diversity  of  interests  among  our 
people,  that  to  get  together  on  some  rallying-ground  upon  which  all 
can  combine  for  the  passage  of  legislation  is  a  necessary  thing  and 
a  difficult  thing. 

I  want  to  say  one  word  more  in  connection  with  branch  banking. 
The  little  country  of  Canada  is  held  up  to  us  as  a  model,  notwith- 
standing the  fact  that  you  could  take  twenty  banking  systems  like 
Canada's,  put  them  side  by  side,  and  they  would  not  equal  the 
strength  or  power  of  the  banking  system  of  the  United  States.  The 
resources  of  all  the  banks  of  Canada  are  not  equal  to  the  resources 
of  the  banks  of  the  one  great  city  of  New  York  in  the  United  States. 
Then,  why  model  a  system  of  5,000  national  banks,  scattered  all  over 
this  great  country,  after  a  small  banking  system  like  that  in  Canada, 
and  which  has  its  real  test  ahead  of  it?  We  have  here  the  greatest 
banking  system  in  the  world.  I  have  heard  it  held  up  to  great 
criticism.  I  have  heard  Americans  visiting  in  Europe  say  they  were 
ashamed  of  our  banking  system,  or  the  banking  system  of  the  United 
States,  in  comparison  with  that  of  Europe.  We  have  not  built  up 
the  banking  system  of  the  United  States  upon  the  continental  idea. 
Two  lines  of  thought  have  run  along  side  by  side  in  financial  matters 
in  the  United  States.  The  old  banks  of  the  United  States — the 
First  and  the  Second  Banks  of  the  United  States — were  the  Ameri- 
can expression  of  the  idea  of  continental  banking,  but  we  did  not 
follow  along  that  line.  Possibly  we  made  a  mistake.  I  do  not 
think  so.  We  did  not  follow  along  in  those  lines,  but  built  up  a 
banking  system  upon  another  theory.     The  banking  system  in  the 


BANKING  REFORM  AND  CURRENCY  SECTION  357 

United  States  was  built  up  by  protecting  the  rights  and  the  oppor- 
tunities of  the  small  man  and  the  small  bank  in  business — built  up 
from  units,  individuals,  from  the  bottom  up!  The  European  sys- 
tem of  centralized  banks  with  branches  was  built  from  the  top  down. 
It  has  been  of  the  greatest  importance  to  this  nation  industrially 
that  we  have  pursued  the  American  idea  in  banking.  It  is  the  same 
idea  that  underlies  the  theory  of  protective  tariff.  Let  the  little  man 
grow.  Let  him  have  a  chance.  Give  the  American  a  chance,  and 
he  soon  grows  in  size  and  strength,  so  that  in  time  commercially 
and  financially  he  will  come  to  dominate  the  world.  And  he  has 
in  one  sense  done  it  in  this  banking  system  of  ours,  which  at  times 
is  held  up  for  ridicule  and  criticised  severely  in  comparison  with 
the  systems  of  Europe.  This  system  of  ours,  this  banking  power 
of  ours,  in  1890  was  a  little  more  than  the  banking  power  of  the 
United  Kingdom,  and  a  little  less  than  the  banking  power  of  con- 
tinental France.  Within  ten  years  this  banking  power  of  ours  has 
grown  so  that  it  is  now  within  12  per  cent.,  not  only  of  the  banking 
power  of  the  United  Kingdom,  but  of  the  banking  power  of  the 
United  Kingdom  and  of  continental  Europe  put  together.  And 
we  have  built  this  system  up  by  protecting  the  small  banker. 

Now,  however  we  may  differ  as  to  this  question  of  branch  bank- 
ing, let  me  say  right  here  that,  as  practical  men,  we  all  know  that  at 
this  particular  time  there  is  no  chance  of  a  branch-banking  law 
going  upon  our  statute-books.  Right  or  wrong,  debatable  question 
as  it  may  be,  there  is  at  this  time  in  the  United  States  a  widespread 
apprehension  lest  this  great  process  of  centralization  and  consolida- 
tion of  industry  and  of  capital  is  not  too  greatly  curtailing  the 
opportunities  and  chances  of  the  individual.  Right  or  wrong,  debat- 
able as  that  question  may  be,  we  know  that  that  apprehension  exists. 
And  we  all  know  how  futile  it  is  to  expect  to  have  passed  into  law 
any  change  which  removes  existing  restrictive  provisions  of  law 
against  branch-banking  systems,  and  opens  still  further  the  way  for 
the  same  process  of  consolidation  and  centralization  to  go  on  in  the 
banking  business  a^  is  now  going  on  in  general  commercial  and 
industrial  business. 

I  do  not  want  to  be  considered  an  obstructionist.  I  think  it  is 
time  to  take  a  step  in  advance,  bul  take  a  step  that  is  safe.  We  do 
not  want  to  consider  the  question  of  branch  banking  as  a  matter 


35«  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

even  for  discussion  among  the  bankers  of  the  United  States,  as  a 
thing  at  present  practicable  or  possible.  I  do  not  think,  as  a  matter 
of  principle,  we  can  afford  in  this  country  to  depart  from  our  present 
theory  of  banking.  Under  it  has  been  developed  the  greatest  bank- 
ing system  of  the  world.  The  time  is  not  ripe  for  branch  banking 
in  this  country,  if  such  a  time  ever  will  come.  We  do  not  have  to 
disagree  entirely  with  the  economists  in  holding  this  position.  We 
know  that  the  rates  of  interest  on  certain  forms  of  collateral  loans 
will  be  lower  under  a  branch-banking  system.  We  know  that  the 
farmer  having  grain,  or  any  other  commodity  which  has  a  cash 
value  in  the  established  markets,  can  through  branch  banking  get  a 
lower  rate  of  interest.  There  will  be  fewer  rooms  to  rent.  There 
will  be  fewer  clerks  to  employ.  There  will  be  certain  economies  in 
the  management  of  the  business,  which  might  in  the  older  and  more 
fully  developed  communities  in  the  East  fully  compensate  the  people 
for  the  loss  of  some  of  the  advantages  the  small  bank  gives  to  the 
community  and  the  public.  But  it  is  doubtful.  Branch  banking 
would  certainly  not  aid  in  building  up  our  undeveloped  country,  and 
the  newer  sections  of  the  United  States.  He  who  would  stand  for 
the  common  good  of  all  should  argue  the  question  from  the  stand- 
point of  the  people  of  the  undeveloped  country,  and  from  the  stand- 
point of  the  people  building  up  a  great  and  undeveloped  country ; 
for  the  United  States  as  a  whole  is  still  undeveloped.  If  you  dis- 
courage the  small  bank,  you  do  not  injure  so  much  the  depositors  of 
a  small  community,  but  you  curtail  the  opportunity  for  credit  of  the 
small  borrower;  and  it  is  the  small  borrower  of  the  United  States 
who  has  built  up  the  country.  It  is  folly  to  maintain  that  an  agent 
of  a  branch  bank,  acting  at  a  distance  under  delegated  authority, 
can  exercise  the  same  discretion  and  have  the  same  latitude  in  the 
making  of  loans  in  which  the  personal  equation  is  an  element,  as 
does  the  local  bank  acquainted  with  local  conditions  and  authorized 
to  cope  with  a  local  situation.  It  is  the  man  who  goes  in  to  start 
a  little  business — a  little  wholesale  business,  a  small  manufacturing 
business,  a  small  mining  business,  or  some  other  business  of  small 
beginnings — who  has  developed  and  built  up  this  country.  He 
does  not  often  have  collateral.  The  money  he  borrows  often  forms 
a  certain,  and  even  large,  proportion  of  the  total  investment  made 
by  him — money  advanced  him  because  he  has  character  and  stand- 


BANKING  REFORM  AND  CURRENCY  SECTION  359 

ing  with  the  local  bank.  The  local  banker  knows  him,  has  followed 
him,  trusted  him,  and  gives  him  credit  upon  his  representations  that 
he  will  pay,  not  upon  his  collateral.  Out  of  the  little  shops  of  the 
Deerings  and  the  McCormicks  and  of  the  Studebakers  of  years  ago, 
and  the  little  businesses  of  such  men,  have  grown  these  magnificent 
corporations  which  are  commencing  to  dominate  the  world;  and  it 
is  by  the  protection  of  the  opportunity  of  the  small  man  to  credit 
that  we  are  building  up  this  great  commonwealth  of  ours.  The  man 
who  will  bring  out  from  this  soil  its  riches,  the  man  who  will  be  a 
great  manufacturer,  the  great  farmers  of  the  future,  some  of  them 
are  hard  up  now,  some  are  having  trouble  right  now  to  pay  back  the 
little  money  advanced  them  with  which  to  start  their  struggling 
industries  by  the  small  banker  who  trusted  them.  Some  of  them 
will  go  under,  but  more  of  them  will  keep  on,  until  this  great  state 
of  yours,  like  this  great  nation  of  ours,  shall  dominate  over  its  com- 
petitors through  the  rule  of  the  "survival  of  the  fittest,"  and  the 
protection  of  the  rights  of  the  individual  by  law. 


BANK  NOTE  EXPERIENCE  OF  TWENTY  YEARS— 

1 882- 1 902 

AN   ADDRESS   DELUDED   BY    HORACE   WHITE,   FORMERLY    EDITOR   OF   THE    NEW    YORK 
EVENING  POST,  BEFORE  THE  BANKERS'  CLUB  OF  CHICAGO,  IN  THE  FALL  OF   I903. 

The  national  banking  act  passed  in  1864  provided  that  the 
whole  amount  of  national  bank  notes  should  not  exceed  $300,000,- 
000  and  that  such  notes  should  be  secured  by  bonds  of  the  United 
States  at  the  rate  of  not  less  than  $100  for  each  $90  of  notes.  The 
banks  were  required  to  hold  the  same  percentage  of  cash  reserve 
against  notes  as  against  deposits.  The  whole  amount  of  $300,000,- 
000  was  taken  out  during  the  following  six  years.  In  1870  new 
banks  could  not  obtain  circulation  except  by  buying  it  from  others. 
A  premium  as  high  as  6  per  cent,  was  paid  for  it  in  some  cases. 
No  bonds  could  be  received  as  security  for  circulation,  bearing  in- 
terest at  a  1-  rate  than  5  per  cent.  Most  of  them  bore  interest 
at  <>  per  cent.  A  tax  of  I  per  cent,  per  annum  was  imposed  on  the 
average  amount  of  notes  in  circulation. 


360  PRACTICAL  PROBLEMS  IX  BANKING  AND  CURRENCY 

In  [865  Congress  passed  a  law  making-  the  note-issuing  func- 
tion o\  hanks  proportionate  to  their  paid-up  capital.  Those  whose 
capital  did  not  exceed  $500,000  might  issue  90  per  cent,  of  such 
capital.  As  the  capital  increased,  the  proportion  of  notes  dimin- 
ished. Banks  having  $3,000,000  or  more  of  capital  could  issue 
notes  to  the  amount  of  60  per  cent.  only. 

In  1870  Congress  extended  the  aggregate  limit  of  bank-note 
circulation  to  $354,000,000.  In  1874  it  repealed  the  requirement 
of  a  cash  reserve  to  be  held  against  outstanding  circulation,  and 
adopted  in  lieu  thereof  a  5  per  cent,  redemption  fund  to  be  kept 
in  the  treasury  at  Washington.  In  1875  the  sum  of  $342,000,000 
of  circulation  had  been  taken  out.  This  was  the  net  amount ;  that 
is,  the  amount  outstanding,  less  the  part  which  was  in  course  of 
retirement  by  banks  in  liquidation,  etc.  In  the  statistics  which 
follow,  where  I  speak  of  the  volume  of  note  circulation,  I  shall 
mean  the  net  amount. 

Congress  then  repealed  the  aggregate  limit  altogether,  but  did 
not  change  the  proportions  of  circulation  to  capital  allowed  to  in- 
dividual banks.  Although  the  limit  of  volume  no  longer  existed, 
and  although  new  banks  were  coming  into  existence  all  the  time, 
the  circulation  now  began  to  decline,  falling  to  $302,000,000  in 
1877.  The  reason  for  this  decline  is  found  in  the  refunding  of 
the  national  debt.  As  the  time  was  approaching  when  the  5-20 
bonds  would  be  redeemable  at  par,  many  banks  embraced  the  oppor- 
tunity to  retire  their  circulation,  sell  their  bonds,  and  save  the 
premium  which  still  remained.  Probably  all  of  them  did  so,  but 
most  of  them  bought  bonds  of  the  new  issue,  bearing  lower  rates  oi 
interest.  A  certain  proportion  of  them,  however,  either  discon- 
tinued circulation,  or  reduced  their  allotments,  or  postponed  taking 
out  the  amounts  to  which  they  were  entitled. 

In  1878  the  circulation  began  to  rise  again,  reaching  $332,000,000 
in  1882.  The  population  of  the  United  States  by  the  census  of  1880 
was  slightly  over  50,000,000. 

A  decline  of  the  bank-note  circulation  now  began  and  continued 
for  nine  years.  It  reached  its  minimum  ($125,000,000)  in  1891. 
During  that  interval  there  was  a  contraction  of  $207,000,000  of  the 
bank-note  circulation,  or  more  than  62  per  cent.  The  reasons  for 
this    decline   were:     (1)    the    rapid    redemption    of    United    States 


BANKING  REFORM  AND  CURRENCY  SECTION  361 

bonds,  more  than  one  thousand  millions  of  which  were  paid  off 
during  that  period;  and  (2)  the  augmentation  of  the  price  of  the 
remainder.  The  4  per  cents  rose  to  nearly  129  in  the  year  1889. 
The  population  of  the  United  States  by  the  census  of  1890  was 
62,000,000 — an  increase  of  12,000,000  in  ten  years. 

The  next  five  years  embraced  the  panic  of  1893.  In  this  period 
the  treasury  was  required  to  issue  new  bonds  to  the  amount  of 
$262,000,000.  The  price  of  4  per  cents  running  thirty  years  fell 
as  low  as  104.49,  at  which  rate  the  bond  syndicate  of  1895  took 
$62,000,000,  the  rate  of  interest  on  the  investment  being  2>ZA  Per 
cent.  This  rate  of  interest  offered  greater  inducement  to  banks  to 
take  out  circulation,  which  rose  to  $190,000,000  in  1898.  In  that 
year  the  Spanish  war  began  and  Congress  issued  $200,000,000  of 
bonds  bearing  interest  at  3  per  cent.  These  bonds  afforded  a  more 
profitable  basis  for  bank  circulation  than  the  previous  issues.  The 
circulation,  however,  did  not  increase  much  until  Congress  passed 
the  law  of  1900  authorizing  the  issue  of  notes  to  the  par  value  of 
the  bonds  and  to  the  full  amount  of  the  capital  stock.  The  same 
act  authorized  the  exchange  of  existing  bonds  maturing  in  1904, 
1907,  and  1908  for  2  per  cent,  bonds  to  run  thirty  years.  These  bonds 
were  made  receivable  at  par  as  security  for  circulating  notes.  The 
tax  on  notes  so  secured  was  reduced  to  one-half  of  1  per  cent,  per 
annum,  the  tax  on  other  notes  remaining  at   1  per  cent. 

These  provisions  of  the  law  gave  a  new  impulse  to  the  bank 
circulation,  which  rose  to  $328,000,000  in  the  year  1902.  It  was 
less  by  $4,000,000.  however,  than  that  of  1882,  although  population 
had  increased  from  50,000,000  to  76,000,000  during  the  interval, 
and  wealth  had  increased  in  a  still  greater  ratio.  The  percentage 
of  circulation  to  national  bank  capital  in  1882  was  81.60;  in  1902 
it  was  53.32.  The  ratio  of  bank  notes  to  population  in  1882  was 
$6.50  per  capita.     In   1002  it  was  $4.25  per  capita. 

During  the  last  twelve  months  the  Secretary  of  the  Treasury, 
by  offering  to  the  banks  premiums  in  various  forms,  has  managed 
to  increase  the  note  circulation  $55,672,680,  bringing  the  whole  Up 
to  $379,515,824  on  the  30th  of  September  last.  To  secure  this 
increase  lie  has  made  use  of  $161,778,285  of  the  treasury  surplus 
as  hank  deposits,  the  use  of  which  has  probably  been  worth  to  the 
depositories  as  much  as  3  per  cent,  during  the  past  year.     In  other 


362  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

words,  a  bonus  of  at  least  $5,000,000  has  been  given  to  the  banks 
for  taking  out  $55,000,000  of  new  circulation.  During  this  time 
government  bonds  to  the  amount  of  $265,295,960,  maturing  in 
1904,  1907,  and  1908,  have  been  and  are  still  drawing  interest  at 
5,  4,  and  3  per  cent,  respectively.  I  allude  to  these  facts  not  for 
the  purpose  of  criticising  the  Secretary's  actions,  but  merely  to  show 
that  this  increase  of  bank-note  circulation  is  highly  artificial  and 
cannot  last.  The  circulation  even  now  is  only  50  per  cent  of  the 
amount  issuable  under  the  law. 

These  are  the  main  facts  constituting  our  bank-note  experience 
of  twenty  years.  What  next?  The  country  is  gaining  rapidly  in 
population  and  wealth.  Both  of  these  elements  call  for  additional 
circulating  medium.  The  growth  of  population  calls  for  an  arith- 
metical increase:  but  the  growth  of  wealth  at  the  same  time  calls 
for  a  geometrical  increase,  since  the  same  number  of  persons 
carry  more  money  in  their  pockets  when  they  are  flush  than  when 
they  are  pinched.  But  we  have  come  to  an  end  of  currency  ex- 
pansion under  existing  laws,  I  think. 

It  is  true  that  gold  certificates  can  be  obtained  to  any  amount 
in  denominations  not  smaller  than  $20,  and  it  is  a  fact  that  the 
volume  of  such  certificates,  which  was  $363,311,089  in  September, 
1902,  has  increased  during  the  past  twelve  months  to  the  sum  of 
$420,487,869.  While  the  Secretary  of  the  Treasury  was  lifting 
the  bank-note  circulation  $55,000,000  by  jack-screws,  the  gold  cer- 
tificates increased  $57,000,000  by  a  natural  process.  It  would  seem, 
therefore,  that  gold  certificates,  though  costing  one  hundred  cents 
for  every  dollar,  are  not  the  most  expensive  form  of  circulating 
medium  that  our  government  offers  to  the  trading  community.  The 
volume  of  gold  certificates  now  exceeds  the  net  amount  of  bank 
notes  by  more  than  $40,000,000. 

Our  circulating  medium  at  the  present  time  consists  approxi- 
mately of  the  following  items: 

Gold    $1,000,000,000 

Silver    (including    subsidiary) 625,000,000 

Legal    tender    notes 363,500,000 

National  bank  notes    (net) 379,000,000 

$2,367,500,000 
From  what  quarter  may  we  expect  any  increase  of  circulating 


BANKING  REFORM  AND  CURRENCY  SECTION  363 

medium  commensurate  with  our  increasing  population  and  wealth? 
I  assume  that  nobody  expects  a  new  issue  of  greenbacks,  or  the 
free  coinage  of  silver,  or  any  coinage  of  that  metal  except  for  sub- 
sidiary purposes.  We  already  have  as  much  gold  as  we  need  to 
ensure  stability  in  our  monetary  system.  Forcing  ourselves  to  buy 
more  of  it  than  is  needed  to  safeguard  the  bank  exchanges,  is  a 
waste  of  capital. 

Twenty  years  ago  I  foresaw  the  crisis  that  we  have  now  reached. 
In  an  article  published  in  Lalor's  "Cyclopedia  of  Political  Science" 
in  1883,  I  said: 

"The  conclusion  is  irresistible  that  when  the  national  bonds  are 
paid  off,  or  when  they  become  so  scarce  that  the  banks  cannot  ob- 
tain them,  or  so  high  in  price  that  no  profit  can  be  made  by  issuing 
notes  upon  them,  the  national  bank-note  system  must  come  to  an 
end,  unless  the  capital  of  the  banks  themselves  and  the  responsi- 
bility of  the  shareholders  can  be  relied  upon  as  sufficient  security. 
It  is  plain  that  if  a  bank  has  in  its  own  vaults  the  capital  heretofore 
invested  in  the  United  States  bonds  which  it  has  deposited  in  the 
treasury,  its  ability  to  redeem  its  notes  will  be  perfect.  The  ques- 
tion is  how  to  ensure  that  it  shall  always  have  this  capital  within 
reach." 

I  then  made  certain  suggestions  for  what  we  now  call  "asset 
currency,"  but  I  did  not  include  in  them  the  safety  fund  plan,  or 
mutual  insurance  of  bank  notes,  that  was  first  tried  in  New  York 
seventy  years  ago  and  is  now  in  successful  operation  in  Canada. 

Ten  years  later,  while  the  World's  Fair  was  in  progress,  the 
American  Bankers'  Association  met  in  Chicago  and  I  was  asked 
to  deliver  an  address  to  its  members.  I  took  for  my  text  "An 
Elastic  Currency,"  and  showed  that  a  bond-secured  currency  never 
could  be  elastic,  since  its  movements  were  governed  by  the  price 
of  bonds  and  not  by  the  demands  of  trade.  The  silver  craze  was 
then  at  its  height,  and  the  country  was  vociferous  with  the  demands 
of  politicians  and  the  so-called  debtor  class  for  more  money. 
I  thought  that  it  was  a  fitting  time  to  show  how  a  sound  currency 
could  be  obtained  in  exactly  the  amounts  needed  by  legitimate 
business,  more  expeditiously  and  cheaply  than  by  buying  silver 
bullion.  With  the  view  of  offsetting  the  silver  craze,  as  well  as  of 
meeting  an   impending   crisis   in   the  bank-note   system,   I   renewed 


364  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

my  previous  suggestions  and  added  a  sketch  of  the  old  safety  fund 
system  of  New  York,  showing  how  it  might  be  easily  adapted  to 
our  present  exigency.  Other  speakers  at  this  meeting  advocated 
the  same  plan,  and  it  acquired  so  much  headway  that  in  the  follow- 
ing year  (  1804).  when  the  association  met  at  Baltimore,  it  adopted 
a  plan  for  asset  currency  outlined  by  the  Baltimore  clearing  house 
and  presented  by  one  of  its  members.  This  action,  however,  was 
taken  rather  for  the  purpose  of  bringing  the  subject  sharply  before 
the  banking  mind  of  the  country  than  with  the  expectation  of  early 
action  by  Congress. 

Nearly  ten  years  more  have  now  elapsed.  The  silver  craze  has 
passed  away,  but  asset  currency  remains  a  more  burning  question 
than  ever  before.  The  present  Secretary  of  the  Treasury,  Mr 
Shaw,  is  one  of  its  advocates.  His  predecessor,  Mr.  Gage,  is 
another.  The  House  Committee  on  Banking  and  Currency  in  the 
last  Congress  adopted  a  bill  to  carry  it  into  effect,  but  was  prevented 
by  the  state  of  public  business  from  bringing  it  to  a  vote.  I  do  not 
consider  it  a  misfortune  that  a  vote  was  not  then  reached.  It 
is  not  desirable  that  any  important  change  should  be  made  in  our 
banking  laws  until  a  majority  of  bankers-  are  themselves  in  favor 
of  it.  Any  change  in  our  system  of  note  issues  must  have  regard 
to  two  prime  considerations ;  first,  the  goodness  of  the  notes ; 
second,  the  machinery  of  issue  and  redemption.  After  the  good- 
ness of  the  notes  has  been  guaranteed  all  else  is  matter  of  detail, 
which  bankers  alone  are  competent  to  devise  or  pass  judgment  upon. 

As  the  doctrinaire  and  ex-editor,  I  am  now  disposed  to  stand 
aside  and  leave  the  subject  wholly  to  the  banking  fraternity.  They 
cannot  avoid  the  task,  however  much  they  might  like  to,  for  this 
is  one  of  the  unsettled  questions  that  have  no  pity  for  the  repose  of 
nations.  I  am  glad  to  know  that  some  bankers  in  Chicago  com- 
prehend the  situation  and  are  considering  the  details  of  a  plan  of 
asset  currency,  in  order  first  to  satisfy  their  own  minds,  and  then 
to  enable  them  to  answer  questions  which  may  be  asked  by  others. 
I  shall  not  enter  upon  any  discussion  of  details,  but  there  are  some 
general  principles  upon  which  I  would  like  to  say  a  few  words. 

And  first  as  to  "emergency  circulation."  This  is  a  phrase  ap- 
plied by  certain  speakers  and  writers  to  any  issue  of  bank  notes 
over  and  above  the  amount  which  the  speaker  or  writer  considers 


BANKING  REFORM  AND  CURRENCY  SECTION  365 

sufficient.      When    that    maximum    is    reached    the   theory    of    the 
emergency  man  is  that  any  overplus  of  notes  issued  should  be  sub- 
jected to  a  tax  sufficiently  high  to  cause  their  speedy  withdrawal 
from  circulation.     Naturally  there  is  a  very  wide  range  of  opinion 
as   to  what   should   constitute   an   emergency.     The  most   common 
measuring  rod  is  the  bank's  capital,  and  the  usual  dividing  line  be- 
tween tax  and  no  tax  is  at  50  per  cent,  of  the  capital ;    anything 
above  that  to  be  subjected  to  a  tax  ranging  from  1  to  6  per  cent, 
and  increasing  as  the  percentage  increases.     There  are  serious  ob- 
jections to  this  scheme  of  taxation.     In  the  first  place,  it  tends  to 
defeat  the   very  object  of  an   emergency   circulation.     That  object 
is  to  relieve  stringency  and  check  panics,  by  enabling  banks  to  issue 
their  credit  speedily  in  a  form  that  everybody  will  gladly  accept. 
But  the  tax,  if  onerous,  will  prevent  the  banks  from  issuing  their 
notes  and   giving  the  relief  sought   for.     The  avowed  purpose  of 
the  tax  is  to  send  the  notes  home  to  the  issuing  banks  as  soon  as 
possible.     But  it  will  not  have  that  effect  because  when  the  notes 
pass  into  circulation  they  pass  out  of  the  banker's  control.     He  can- 
not call  them  in.     The  only  thing  he  can  do  to  stop  the  tax  will  be 
to  deposit  legal  tender  money  in  the  treasury  to  offset  them.     But 
this  will  reduce  his  cash  reserve  and  curtail  his  power  to  discount 
commercial  paper.     Every  dollar  thus  taken  from  his  reserve  will 
curtail  his  discounts  by  four  dollars  or  more,  and  thus  the  emergency 
circulation,  if  issued,  will  cause  more  stringency  than  it  will  cure. 
But  I  do  not  think  that  it  would  be  issued  under  these  conditions. 
The  advocates  of  this  policy  point  to  the  example  of  Germany, 
where  a  tax  of  5  per  cent,  is  imposed  on  note  issues  of  the  Rcichs- 
bank    in    excess    of   a    certain    amount.     But    there    are    important 
differences  between  the  two  systems.     The  Reichsbank,  by  means 
of  its  three  or   four   hundred   branches,  can   get   possession   of  its 
surplus  of  notes  at  any  time.     They  come  in  as  daily  deposits  and 
can   be   retired    whenever    the   bank   finds    it    advisable    to   do   so. 
Moreover,   the  dividing  line  between   tax   and   no   tax   in   Germany 
is  found  in  the  bank's  cash  reserve,  not  in  its  capital,     ft  is  allowed 
to    issue   450,000,000    marks    on    its    general    credit.     It   may    issue 
a  further  sum  equal  to  its  cash  reserve.     Here  we  reach  the  divid- 
ing line.     On  all  notes  in  excess  of  the  fore  roing  aggregate  it  must 
pay  a  tax  of  5  per  cent,  hut  its  cash  reserve  must  never  be  less  than 


366   PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

one-third  of  its  notes  outstanding.  Obviously  the  cash  reserve 
is  the  proper  criterion  for  fixing  the  limit  of  note  issues  at  any 
particular  tune.  The  bank's  capital  has  no  more  and  no  other 
relation  to  circulating  notes  than  it  has  to  deposits.  Both  notes 
and  deposits  represent  the  bank's  credit  in  different  forms. 

Another  difference  is  found  in  the  fact  that  the  German  bank  is 
managed  by  government  officials  who  have  no  pecuniary  interest 
in  it.  Although  the  property  is  owned  wholly  by  private  persons, 
they  have  no  share  in  its  actual  management.  Thus  the  officers 
of  the  bank  are  not  moved  by  the  desire  of  gain  on  the  one  hand, 
or  by  the  fear  of  giving  offense  to  borrowers  on  the  other.  Still 
another  difference  consists  in  the  fact  that  the  government  has  a 
proprietary  interest  in  the  bank's  earnings,  although  not  in  its  capital ; 
and  naturally  it  desires  to  get  all  the  revenue  it  can  from  that  source. 
So  when  a  panic  comes  and  there  is  a  demand  for  more  than  the 
ordinary  amount  of  notes,  it  exacts  for  the  public  treasury  5  per 
cent,  interest  on  the  excess.  That  is  quite  right  in  the  case  of  a 
government  which  needs  all  the  revenue  it  can  get,  which  is  not 
our  case. 

Another  question  much  debated  is  whether  note  holders  ought 
to  be  preferred  creditors  of  failed  banks.  That  they  are  so  now 
is  not  generally  perceived  and  is  sometimes  disputed.  The  fact 
is,  however,  that  at  the  bank's  birth  the  government  not  only 
takes  from  its  assets  a  sum  which  it  deems  sufficient  to  pay  the  note 
holders  in  full  in  case  of  insolvency,  but  it  provides  that  if  by  any 
mischance  this  should  not  be  sufficient  it  shall  have  a  first  lien  on 
the  remaining  assets  for  that  purpose.  So  the  question  we  are 
asked  is,  whether  the  note  holders  shall  continue  to  be  preferred 
creditors,  as  they  always  have  been  under  the  national  banking  act ; 
or  whether,  under  a  scheme  of  asset  currency,  this  preference 
shall  cease.  The  burden  of  proof  is  on  those  who  would  make  the 
change  of  practice. 

Making  note  holders  preferred  creditors  of  failed  banks  is  the 
common  rule  in  Anglo-Saxon  countries.  It  took  root  in  the  United 
States  before  the  Civil  War.  Its  first  appearance  on  the  statute 
book  was  in  Connecticut  in  1831,  where  it  was  enacted  that  in  case 
of  the  failure  of  a  bank  the  holders  of  its  notes  of  the  denomination 
of  $100  or  less  should  have  a  prior  lien  on  the  assets  of  every  de- 


BANKING  REFORM  AND  CURRENCY  SECTION  367 

scription.  The  underlying  thought  of  the  legislature  was  to  protect 
the  poorer  classes  of  the  community — those  who  are  least  able  to 
protect  themselves.  It  was  a  good  motive  then  and  is  equally  valid 
now,  but  the  most  cogent  reason  for  giving  a  preference  to  note 
holders  is  that  it  seems  to  be  necessary  in  order  to  make  the  notes 
circulate  at  all.  If  other  means  can  be  devised  to  make  the  notes 
safe  and  to  convince  the  public  that  they  are  safe,  so  that  they  will 
pass  without  hesitation  or  question,  then  the  preference  now  and 
heretofore  given  to  note  holders  in  this  country  may  be  dispensed 
with.     Otherwise  it  should  be  retained. 

This  leads  up  to  a  suggestion  made  by  Secretary  Shaw  in  a 
recent  speech,  that  the  government  should  redeem  all  the  notes  of 
failed  banks,  both  those  issued  on  the  present  plan  and  those  issued 
on  the  asset  currency  plan,  and  reimburse  itself  as  regards  the 
latter  by  means  of  a  safety  fund  to  be  created  in  a  certain  way. 
This  is  the  wisest  suggestion  that  has  yet  been  made  by  anybody 
in  authority,  and  it  comes  at  the  psychological  moment.  It  may 
seem  startling  at  first  that  the  government  should  pledge  itself 
to  redeem  the  notes  of  private  corporations,  but  it  does  so  now,  on 
condition  that  it  shall  be  secured  against  loss.  The  deposit  of 
bonds  at  Washington  is  not  the  only  way  of  securing  the  govern- 
ment. The  deposit  of  money  is  equally  effective.  How  much 
money  is  needed  to  secure  a  given  amount  of  bank  notes  is  to  be 
ascertained  by  experience.  This  amount,  whatever  it  may  be, 
should  be  contributed  by  the  banks  themselves  in  proportion  to  their 
circulation.  This  is  a  matter  of  detail  in  which  the  advice  of 
bankers  will  be  most  important. 

The  Indianapolis  plan  of  asset  currency  proposes  that  the  notes 
shall  be  receivable  for  all  government  dues,  but  that  the  government 
shall  not  pay  them  to  its  creditors  without  their  consent.  This 
would  make  the  government  responsible  for  the  circulation  in  an 
indirect  manner,  since  all  failed  bank  notes  would  find  their  way 
through  the  tax  office  to  the  treasury.  No  individual  holder  could 
lose  anything  by  them  any  more  than  by  the  present  silver  certifi- 
cates. The  government  would  recoup  itself  out  of  the  safety  fund, 
and  the  safety  fund  would  recoup  itself  out  of  the  assets  of  the  failed 
banks,  as  under  the  Canadian  system. 

The    chief    advantage    of    making    the    government    responsible 


36S   PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

for  the  notes  is  that  it  would  dissipate  all  fears  as  to  the  goodness 
of  the  circulation.  It  would  bridge  over  the  transition  from  the 
present  decaying  system  to  a  living  self-perpetuating  one  It  is 
this  transition  that  sets  people  shivering  at  the  river's  brink.  "What 
would  happen  if  the  notes  of  one  bank  should  turn  out  to  be  bad? 
Would  not  such  a  phenomenon,  so  unexpected,  so  out  of  the  range 
of  experience,  so  diabolical,  start  a  run  on  other  banks  and  lead  to 
social  convulsion?"  Such  is  the  thought  that  presents  itself  to 
the  minds  of  people  at  first.  Now  government  redemption  solves 
this  difficulty  completely.  It  solves  more  difficulties  than  anything 
else  that  has  been  proposed,  and  it  involves  the  smallest  possible 
change  in  the  method  of  insuring  the  notes  of  the  few  banks  that 
may  become  insolvent — probably  not  more  than  8  per  cent,  of  the 
whole  number. 

The  central  redemption  of  bank  notes  is  a  much  debated  subject 
just  now,  and  nothing  else  calls  for  more  careful  consideration. 
This  is  a  question  that  concerns  the  bankers  rather  than  the  public. 
Under  existing  law  national  bank  notes  are  legal  tender  in  all 
payments  to  national  banks.  So  in  practice  every  bank  converts 
into  par  funds  the  notes  of  every  other  bank.  If  the  law  required 
each  bank  to  redeem  the  notes  of  every  other  one,  it  could  not  do 
more  for  its  customers,  and  for  the  public  in  general,  than  it  does 
now.  Hence  it  is  all  the  more  necessary  to  provide  facilities  by 
which  each  bank  may  convert  the  notes  of  other  banks  into  par 
funds,  lest  it  should  be  choked  with  a  currency  not  legal  tender 
and  not  countable  in  its  legal  reserve. 

I  understand  that  some  banks  do  count  the  notes  of  other 
banks  as  part  of  their  legal  reserve,  although  the  law  forbids 
that  practice.  Such  a  practice  ought  to  be  strongly  repressed  be- 
cause it  is  contrary  to  law,  because  it  leads  to  other  infractions  of 
law,  and  because  it  is  opposed  to  sound  principles  of  banking. 
Bank  A  may  argue  that  the  notes  of  Bank  B  must  be  good  because 
they  are  redeemed  on  demand  at  Washington  and  at  B's  counter, 
and  because  they  are  backed  by  government  bonds.  Bank  B  may 
say  the  same  of  the  notes  of  Bank  A.  Now  it  is  conceivable  that 
the  cash  reserve  of  each  may  be  composed  wholly  of  the  notes  of 
the  other.  In  such  a  case  the  depositors  in  Bank  A  when  they  draw 
money  will  receive  the  notes  of  Bank  B,  and  when  they  present 


BANKING  REFORM  AND  CURRENCY  SECTION  369 

them  for  redemption  will  receive  the  notes  of  Bank  A.  They 
might  as  well  have  taken  the  notes  of  Bank  A  in  the  first  place,  or 
even  better  since  they  would  have  saved  shoe  leather  by  doing  so. 
The  same  argument  which  justifies  a  bank  in  counting  the  notes  of 
another  bank  in  its  legal  reserve  is  equally  valid  for  including  its 
own  notes  in  that  category,  which  leads  to  the  predicament  of  hav- 
ing no  cash  reserve  at  all.  It  is  the  old  and  mischievous  fallacy 
of  considering  security  for  bank  notes  the  same  thing  as  payment 
of  them. 

Central  redemption  of  bank  notes  now  takes  place  at  Washing- 
ton, or  ought  to,  but  it  has  been  rumored  lately  that  the  Secretary 
of  the  Treasury  has  suspended  the  practice.  It  is  said  that  while 
promptly  redeeming  with  public  money  the  notes  sent  in  for  that 
purpose,  he  does  not  compel  redemption  by  the  issuing  banks.  This 
course,  if  it  has  been  followed,  involves  an  infraction  of  the  national 
banking  act,  which  requires  that  monthly  notices  shall  be  forwarded 
to  the  issuing  bank  of  the  amount  of  its  notes  sent  in  for  redemp- 
tion, and  that  the  bank  shall  "forthwith  deposit  with  the  treasury 
of  the  United  States  a  sum  in  United  States  notes  equal  to  the 
amount  of  its  circulating  notes  so  redeemed."  Failure  to  make  this 
deposit  involves  a  glaring  violation  of  law  on  the  part  of  the  bank. 
Failure  to  enforce  the  law  involves  an  equal  violation  on  the  part 
of  the  Secretary.  The  Constitution  says  that  the  President  "shall 
take  care  that  the  laws  are  faithfully  executed,"  and  this  applies 
to  all  the  executive  departments.  They  must  not  merely  govern 
themselves  by  law,  but  they  must  see  that  all  other  persons  and 
porations  under  their  supervision  do  so.  To  assume  that  the 
Secretary's  duty  is  ended  when  the  banks  have  been  notified  of  the 
amount--  flue,  is  as  inconsequential  as  Dogberry's  advice  to  the 
watch  to  thank  God  they  were  rid  of  a  knave. 

A  bank  note  is  a  promise  to  pay  money.  Central  redemption 
;  necessary  in  order  that  the  promise  may  be  fulfilled  speedily, 
neaply,  easily.  The  banking  system  is  an  organization  of  credit, 
->f  which  the  hank  note  is  one  part.  .Anything  which  makes  re- 
demption speedy,  easy,  and  inexpensive  Fortifies  credit  and  builds 
up  the  whole  system.  Central  redemption  has  also  a  reflex  in- 
liirnce  ou  the  banl  -.  It  is  in  the  nature  of  a  tonic.  Tt  prom], is 
iach  bank  to  maintain  a  good  cash  reserve  and  to  keep  its  assets 
24 


37o  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

generally  in  a  liquid  condition,  in  order  to  meet  its  obligations  on 
demand.  It  tends  to  repress  speculation  and  to  prevent  the  lend- 
ing of  money  to  slow  borrowers  and  on  slow  securities. 

The  importance  of  central  redemption  to  the  banks  themselves 
being  manifest,  it  must  be  added  that  bankers  are  the  only  persons 
competent  to  devise  the  machinery  for  it.  They  have  personal 
knowledge  of  the  "runaways"  of  bank  notes.  They  know  where 
the  eddying  currents  of  commerce  bring  them  together  in  heaps, 
where  they  may  be  most  readily  offset  against  each  other.  Notes 
should  be  redeemed  by  clearing,  just  as  checks  are,  and  just  as  New 
England  bank  notes  were,  under  the  Suffolk  system,  the  balances 
only  being  paid  in  cash.  The  places  where  they  come  together 
naturally  should  be  chosen  for  central  redemption.  One-half  of 
all  the  bank  notes  received  at  Washington  are  sent  thither  from 
New  York.  Therefore,  if  New  York  instead  of  Washington  were 
the  place  of  central  redemption,  one-half  of  the  cost  of  transpor- 
tation would  be  saved,  besides  the  cost  of  packing,  unpacking,  re- 
counting, red-taping  and  some  loss  of  time  and  interest.  Eighty 
per  cent,  of  all  the  notes  received  at  Washington  are  sent  from  six 
cities.  Therefore,  if  these  cities  were  chosen  for  central  redemp- 
tion, four-fifths  of  the  present  expense  for  transportation  inward 
would  be  saved.  Washington  City  was  chosen  thirty  years  ago  as 
the  place  of  central  redemption,  not  for  any  commercial  reason, 
but  because  the  notes  were  there  printed  and  issued.  The  replac- 
ing of  worn  and  mutilated  notes  was  the  main  consideration.  But 
new  notes  for  this  purpose  could  be  kept  in  stock  by  the  assistant 
treasurers  of  the  United  States  at  each  of  the  redemption  cities  as 
gold  certificates  are  kept  to  be  issued  in  exchange  for  gold  coin. 

Returning  to  my  theme,  "Our  bank  note  experience  of  twenty 
years,"  is  it  not  clear  that  the  present  system  of  note  issue  is 
doomed?  But  for  two  or  three  circumstances  of  an  extraneous 
kind  it  would  have  been  extinct  ere  now,  for  the  want  of  United 
States  bonds  as  security.  One  of  these  extraneous  circumstances 
was  the  panic  of  1893,  another  was  the  Spanish  war.  These  two 
events  checked  the  payment  of  the  public  debt  and  added  $462,000,- 
000  to  the  principal  thereof.  The  extending  of  short-time  bonds 
to  the  amount  of  $528,000,000  for  thirty  years  was  made  for  the 
purpose  of  keeping  the  bank  circulation  alive.     This  extension  was 


BANKING  REFORM  AND  CURRENCY  SECTION  371 

a  glaring  departure  from  correct  principles  of  public  finance  and  a 
violation  of  American  precedents  and  was  rendered  possible  only  by 
the  paralysis  of  the  Democratic  party  in  the  elections  on  the  silver 
issue.  That  party  had  been  so  stunned  on  the  financial  side  of  its 
head  that  it  had  lost  even  the  power  of  criticising  its  opponent's 
mistakes.  The  Republicans  were  thus  emboldened  to  issue  half  a 
billion  of  bonds,  laying  an  interest  burden  of  the  aggregate  amount 
of  60  per  cent,  on  the  taxpayers,  to  take  the  place  of  debts  which 
might  have  been  paid  off  at  their  early  maturity  at  an  interest 
charge  not  exceeding  15  or  20  per  cent,  and  a  bonus  was  paid  to  the 
bankholders  in  addition.  The  Republicans  expected  by  this  means 
to  postpone  the  day  of  judgment  for  thirty  years,  but  the  result  has 
not  come  up  to  their  expectations.  The  new  2  per  cent,  bonds  rose 
to  such  a  premium  in  the  market  that  the  profit  on  circulation  was 
only  six-tenths  of  I  per  cent,  over  and  above  that  obtainable  from 
mortgage  loans,  and  even  this  surplus  can  be  gained  only  on  con- 
dition of  keeping  the  notes  out  all  the  time.  Hence  the  necessity 
of  using  the  money  in  the  treasury  as  an  additional  jack-screw  to 
keep  the  edifice  from  tumbling  down. 

At  the  meeting  of  the  American  Bankers'  Association  at  New 
Orleans  a  resolution  was  adopted  giving  "unqualified  approval  of 
the  enactment  of  a  law  imparting  a  greater  elasticity  to  the  cur- 
rency system  in  order  to  make  it  responsive  to  the  business  of  the 
country,"  and  calling  for  the  appointment  of  a  committee  to  con- 
sider that  subject  and  report  at  its  next  meeting.  Such  a  report 
was  submitted  at  the  San  Francisco  meeting  last  week.  It  recom- 
mended a  change  in  the  kind  of  securities  to  be  deposited  in  the 
treasury  for  circulating  notes,  making  the  Secretary  the  judge  of 
the  kind  and  amount  required.  This  is  not  a  change  of  system  and 
the  question  is  whether  the  selection  of  an  inferior  kind  of  security 
will  impart  elasticity  to  it.  It  will  still  be  necessary  for  the  banks 
to  pay  more  money  for  the  bonds  than  they  will  get  back  in  the 
form  of  notes.  It  will  still  be  incumbent  on  the  bank's  officers,  in 
the  interest  of  their  shareholders,  to  watch  the  market,  as  they  do 
now,  and  sell  the  bonds,  either  to  secure  a  profit  or  to  avoid  a  loss. 
The  wants  of  trade  will  have  no  more  bearing  upon  the  note-issuing 
function  when  the  bonds  of  New  York  City,  or  of  the  New  York 
Central  Railway,  are  deposited,  than  they  have  now. 


7J2   PRACTICAL  PRORLEMS  IN  BANKING  AND  CURRENCY 

But  a  change  in  the  kind  of  security  accepted  for  bank  notes, 
and  the  adoption  of  an  inferior  kind,  may  have  other  effects.  If 
the  Secretary  of  the  Treasury  is  to  decide  between  different  kinds  of 
bonds,  accepting  some  and  rejecting  others,  and  perhaps  rejecting 
to-day  what  he  accepted  yesterday,  his  powers  will  be  dangerously 
great.  He  will  have  control  of  the  money  market  if  he  chooses, 
and  he  will  be  supposed  to  exercise  control  even  if  he  does  not. 
Even  if  he  uses  his  power  impartially  and  wisely,  he  will  not  escape 
criticism. 

Conversely,  the  Secretary  will  always  be  subjected  to  political 
pressure  to  admit  new  securities  to  the  favored  list,  and  speculators 
will  be  constantly  manufacturing  securities  to  be  put  upon  that  list, 
or  to  fill  the  space  left  vacant  by  those  withdrawn  from  the  market. 
The  Aldrich  bill  in  the  last  Congress,  which  proposed  to  legalize 
the  practice  of  taking  other  than  government  bonds  as  security  for 
government  deposits,  defined  the  classes  of  bonds  of  states,  cities, 
and  railways  that  might  be  accepted.  It  was  the  opinion  of  Wall 
street  at  that  time  that  the  object  of  the  measure  was  to  create  a 
vacuum  of  one  hundred  and  fifty  millions  in  the  bond  market  to 
be  filled  by  "undigested  securities."  That  vacuum  would  be  much 
larger  if  the  San  Francisco  plan  should  be  adopted.  This  elasticity 
would  not  be  in  the  currency,  but  in  the  securities. 

In  the  same  newspapers  which  contained  this  news  from  San 
Francisco  was  a  cablegram  from  Berlin  reporting  an  interview  be- 
tween Flerr  Koch,  president  of  the  Reichsbank,  and  an  American. 
"Your  country,"  said  Herr  Koch,  "has  already  taken  long  strides 
toward  a  sound  monetary  system  in  the  repeal  of  the  Sherman  silver 
law  as  well  as  in  more  recent  measures.  This  legislation  has  been 
dictated  by  a  determination  to  keep  the  currency  sound.  But  from 
our  German  experience  we  regard  elasticity  as  being  next  in  im- 
portance to  soundness,  and  as  being  indeed  indispensable  for  the 
circulating  medium  of  a  great  commercial  nation;  and  we  think 
it  would  be  of  immense  advantage  for  you  to  adopt  some  plan  in 
addition  to  the  check  and  deposit  system,  under  which  the  circula- 
tion would  adjust  itself  to  the  monetary  needs  of  business." 

These  are  words  of  wisdom.  They  mean  that  the  United  States 
ought  to  adopt  a  system  under  which  bank  credit  shall  be  made  avail- 
able   for    circulating   notes   as    well    as    for    checks    and    deposits. 


BANKING  REFORM  AND  CURRENCY  SECTION  373 

Bank  credit,  I  affirm,  does  not  enter  into  the  currency  system  of 
this  country  at  all,  and  we  shall  never  have  an  elastic  system  until 
it  does. 


THE  STRENGTH  AND  WEAKNESS  OF  AMERICAN 

FINANCE 

ADDRESS  DELIVERED  BY  ELLIS  H.  ROBERTS,  EX-TREASURER  OF  THE  UNITED  STATES, 
BEFORE  THE  AMERICAN  BANKERS'  ASSOCIATION,  AT  NEW  YORK,  SEPTEMBER, 
IOX>4. 

Fortunately,  the  United  States  is  not  asking  for  new  loans. 
The  government  is  not  increasing  its  debt  by  long  bonds  or  by  ex- 
chequer bills  for  temporary  needs.  If  in  any  month  outlay  exceeds 
income,  the  deficit  is  covered  by  previous  surplus  laid  away.  In- 
dividuals and  corporations  reach  out  for  vast  sums  in  loans,  but 
the  nation  is  not  a  borrower  in  any  market.  Its  interest-bearing 
debt  at  the  beginning  of  the  fiscal  year  1898  was  $847,365,130,  and 
the  annual  interest  was  $34,387,315.  A  loan  of  $200,000,000  was 
made  by  popular  subscription  for  war  purposes.  Yet  at  the  start 
of  the  current  fiscal  year  that  debt  was  only  $895,157,440  and  the 
annual  interest  $24,176,745.  In  the  interval  the  government  has 
paid  the  cost  of  the  Spanish  War,  $20,000,000  under  the  treaty  of 
Paris,  and  $50,000,000  on  account  of  the  Panama  Canal.  Now 
the  nation  stands  on  a  granite  basis  of  credit,  and  over  the  door  of 
the  treasury  may  be  inscribed :  "We  are  not  borrowing  here." 
This  fact  reduces  the  financial  problem  to  simple  terms.  The  gov- 
ernment leaves  the  loan  market  alone.  Enough  factors  remain, 
however,  to  make  it  worth  while  to  study  the  strength  and  the  weak- 
ness of  American  finance. 

For  a  full  discussion  of  our  theme,  we  might  perhaps  be  required 
to  treat  of  the  receipts  and  disbursements  of  the  government.  We 
may,  however,  in  these  partisan  days,  leave  this  branch  to  the 
orators  and  the  press  of  the  political  parties,  who  will  be  quite 
ready  to  thresh  out  the  straw  to  the  uttermost. 

In  an  ideal  currency  system,  one  would  not  expect  to  find,  be- 
sides subsidiary  and  minor  coin  and  the  disappearing  treasury  notes, 


374  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

six  classes  of  money — gold  coin,  uncovered  notes,  certificates  issued 
for  gold,  certificates  issued  for  silver,  bank  notes,  and  legal  tender 
silver  dollars.  Or  only  four  classes  might  be  named,  to  wit :  gold 
and  its  certificates,  constituting  44.1  per  cent. ;  silver  and  its  cer- 
tificates, 21.2  per  cent.;  uncovered  notes,  13.2  per  cent.;  and  bank 
notes,  17.2  per  cent.  The  financial  architect  would  seek  to  be  rid 
of  uncovered  notes  and  legal  tender  dollars,  and  might  look  askance 
at  the  large  bank  circulation. 

The  United  States  notes,  at  first  and  still  in  theory  a  forced 
loan,  began  without  reserve  behind  them.  The  resumption  act, 
which  aimed  to  redeem  them  in  gold,  gave  them  a  power  for  mis- 
chief as  weapons  for  assault  on  the  official  treasure.  Danger  arose 
when  the  revenue  was  inadequate,  and  the  treasury  became  im- 
poverished. Peril  ceased  when  a  surplus  was  created,  and  the  yellow 
metal  flowed  into  the  national  coffers.  In  itself  the  United  States 
note  is  weak ;  it  gains  strength  as  gold  is  put  behind  it.  The  prac- 
tical banker  may  join  with  the  theorist  in  the  wish  that  it  may  pass 
gradually  into  the  gold  certificate.  That  change  is  going  on  with- 
out jar  or  friction  on  two  paths :  first,  by  the  increase  in  the  gold 
in  the  treasury,  and  second,  by  the  use  of  notes  of  $10  instead  of 
those  of  larger  denomination.  In  five  years  the  $10  notes  have 
run  up  from  just  less  than  $100,000,000  on  July  1,  1900,  to  $193,- 
459,321  in  1902,  to  $245,440,011  on  the  same  date  in  1904.  The 
treasury  gross  gold  in  the  same  period  from  $423,577,971  rose  to 
$681,838,821,  and  is  now  over  $700,000,000.  Thus  these  green- 
backs have  turned  from  large  notes  in  chief  part  to  be  70.7  per  cent, 
in  $10  bills  for  which  the  demand  always,  with  rare  exceptions, 
exceeds  the  supply.  In  the  same  five  years  additions  of  60.9  per 
cent,  to  the  gross  gold  in  the  official  vaults  have  been  made. 

The  share  of  the  uncovered  notes  to  the  total  currency  is  steadily 
growing  less.  From  33.6  per  cent,  in  1880,  and  23.4  per  cent,  in 
1900,  it  has  fallen  to  13  per  cent.  The  danger  from  them  has 
diminished  in  certainly  as  marked  a  ratio.  They  are  to  decrease, 
while  the  general  volume  is  to  increase. 

Congress  could  without  friction  use  at  once  $50,000,000  of  the 
gold  reserve  for  certificates  of  $10  and  $5,  as  a  substitute  for  United 
States  notes  offered  for  redemption,  and  in  each  succeeding  year 
apply  a  like  sum  from  the  inflow  to  continue  such  change.     The 


BANKING  REFORM  AND  CURRENCY  SECTION 


375 


redemptions  of  United  States  notes  last  year  were  $122,680,000 
and  the  average  for  five  years  $101,231,200.  It  would  be  easy  to 
transform  half  of  this  sum  into  gold  certificates.  By  this  process 
the  United  States  notes  would  grow  less  weak,  and  before  very  long 
become  in  fact  gold  certificates,  as  they  are  now  in  essence,  in  the 
ratio  which  the  reserve  holds  to  them,  or  43.2  per  cent. 

The  silver  dollars  have  of  late  been  severely  assailed  in  and  out 
of  Congress.  They  are  denounced  as  excessive  in  volume  and  as 
a  menace  to  the  integrity  of  the  currency.  Demand  has  been  loud 
for  their  redemption  in  gold,  and  for  the  reduction  of  their  number 
by  coinage  into  fractions.  Predictions  have  been  put  forth  that 
some  official  may,  at  his  option,  pay  them  for  interest  or  some  other 
high  obligations. 

Assault  on  a  fortress  does  not  prove  that  it  is  vulnerable,  but 
it  does  challenge  vigilance  and  defense.  While  additions  to  the 
silver  dollars  were  constant,  their  force  for  evil  or  for  good  grew 
apace.  The  repeal  of  the  act  for  the  purchase  of  silver  set  a  barrier 
to  the  current  and  checked  it.  The  recent  stoppage  of  the  coinage 
of  dollars  fixes  a  limit  to  their  volume,  and  permits  a  calm  survey 
of  their  use  and  their  abuse. 

Silver  dollars  in  circulation  and  not  covered  by  certificates  on 
July  1,  1900,  were  $65,889,346,  and  3.2  per  cent,  of  the  total  cur- 
rency. The  volume  increased  for  three  years,  but  the  ratio  fell  to 
3  per  cent,  of  the  total  circulation.  In  the  last  fiscal  year,  including 
the  coinage  for  treasury  notes,  the  last  volume  became  $71,561,684, 
or  2.8  per  cent,  of  the  total  circulation.  The  silver  dollars  in  the 
treasury  reached  the  maximum  from  October  to  December  annually, 
and  the  minimum  in  July  or  June.  In  1900  the  difference  between 
summer  and  early  winter  was  $8,203,467;  in  1901  it  was  $10,- 
422,985;  in  1902  it  was  $6,651,358;  in  1903  it  was  $9,794,447; 
and  in  1904  it  was  $10,011,539.  This  is  a  margin  of  practical  elas- 
ticity in  these  metallic  dollars,  and  marks  the  currents  of  their  use 
in  the  varying  seasons.  This  elasticity  is  in  so  far  an  offset  to  the 
weakness  of  such  coinage. 

The  critic  has  a  right  to  say  that  his  objection  rests  not  only 
against  the  seventy  or  eighty  million  dollars  in  circulation  as  such, 
but  also  against  the  460  or  470  millions  covered  by  certificates.  The 
demand  for  dollars  and  certificates  makes  sturdy  answer.     In  the  late 


376  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

autumn,  the  treasury  finds  the  drain  on  these  kinds  of  currency 
exhaustive!.  Its  ten  offices  in  September,  1900,  held  only  55,006 
silver  dollars  and  $3,646,159  in  silver  certificates.  Since  then  the 
minimum  holdings  have  not  fallen  so  low.  Dollars  were  $1,405,631 
in  December,  1902,  and  $898,275  last  September;  while  silver 
certificates  in-  the  autumn  months  of  1903  and  1904  were  $4,271,- 
562  and  $6,192,783. 

These  conditions  are  created  by  the  movements  of  the  crops, 
which  call  for  dollars  and  small  bills.  The  treasury  prepares  by 
husbanding  such  resources  and  on  August  22  last,  before  the  autumn 
shipments  began,  had  in  its  several  vaults  in  United  States  notes, 
nearly  all  $10,  $15,716,020;  in  silver  dollars,  $22,641,903;  and  in 
silver  certificates,  all  $1,  $2,  and  $5,  $7,100,458.  This  is  a  total 
of  over  $45,000,000  available  for  putting  on  the  market  corn  and 
wheat  and  other  grains,  provisions,  cotton,  and  sugar.  Great  as 
this  sum  is,  if  it  shall  fully  meet  all  the  requirements  of  the  season, 
those  who  have  in  other  years  been  troubled  to  secure  small  cur- 
rency will  rejoice.  As  far  as  it  goes,  it  will  illustrate  the  measure 
of  elasticity  possible  with  forethought  and  vigilance  under  our 
system.     To  that  extent  the  weakness  of  rigidity  is  mitigated. 

Bank  notes  on  July  1,  1900,  issued  by  3,732  banks,  were  $300,- 
115,112  and  14.6  per  cent,  of  the  total  circulation,  and  became  at 
the  outset  of  this  fiscal  year  $433,595,888,  issued  by  5,386  banks, 
and  17.2  per  cent,  of  such  circulation.  They  have  thus  increased 
faster  than  the  currency  as  a  whole.  Students  of  finance  regard 
them  with  very  different  views.  To  very  many  our  banking  system 
seems  the  best  in  the  world.  By  others  bond  security  for  circula- 
tion is  denounced  as  unduly  expensive,  viciously  rigid,  and  un- 
responsive to  trade  necessities.  The  limit  of  the  monthly  reduction 
to  $3,000,000  is  especially  offensive  to  them.  Not  all  such  critics, 
but  many,  seek  a  substitute  in  currency  based  on  general  assets. 
Some  thoughtful  financiers  look  with  alarm  on  the  rapid  and  con- 
tinuous increase  in  bank  notes,  and  object  to  any  device  for  adding 
to  them.  The  suggestion  is  urged  for  the  gradual  substitution  of 
government  certificates  covered  by  gold  and  silver.  Bankers  are 
questioning  the  profit  of  putting  out  circulation,  and  some  great 
institutions  restrict  their  deposits  of  bonds  for  that  purpose  to  the 
lowest  amount  permitted  by  law. 


BANKING  REFORM  AND  CURRENCY  SECTION  377 

While  less  than  one-sixth  of  the  entire  circulating  medium,  bank 
notes  give  rise  to  by  far  the  greater  share  of  discussion  in  the 
field  of  the  currency.  Is  such  currency  a  deformed  and  nervous 
sister  in  the  family,  requiring  most  of  the  expert  care  of  doctors? 
Or  is  it  Cordelia  among  Lear's  daughters,  constant,  faithful,  and 
true,  dispensing  comfort  and  blessing?  Absolutely  safe  as  they  are, 
everywhere  current  for  purchase  and  payment,  these  notes  are  the 
storm  center  of  financial  controversy. 

Of  late  another  weakness  in  our  currency  is  vigorously  exposed. 
The  paper  money  is  not  clean.  Banks  are  not  willing  to  pay  the 
charges  for  transportation  to  secure  new  bills ;  if  they  were,  the  face 
of  the  notes  could  be  kept  more  nearly  fresh  as  the  bedewed  morn- 
ing flowers.  No  general  agreement  on  such  a  policy  is  likely.  Can 
Congress  be  induced  to  spend  half  a  million  or  a  million  dollars  a 
year  for  the  increased  redemption,  the  larger  number  of  new  bills, 
and  the  cost  of  shipment  in  and  out?  This  answer  can  hardly  be 
given  here  and  now. 

Instability  is  not  a  virtue  in  finance.  In  this  country  no  topic 
is  too  sacred  for  discussion,  and  statesmen  and  professors,  editors 
and  orators  have  not  had  the  field  of  the  currency  to  themselves. 
Everyone  who  can  sharpen  a  pencil  or  own  a  typewriter  or  get  an 
audience  in  a  club  or  on  a  corner,  can  tell  where  Hamilton  was 
wrong,  where  Congress  has  blundered,  how  useless  is  our  nation's 
experience.  The  halls  of  legislation  are  open  to  every  scheme. 
The  theorists  who  assume  infinite  wisdom,  and  discern  only  igno- 
rance and  vile  motives  in  opponents,  are  always  busy.  The  cynics 
clothed  in  malice,  who  find  nothing  good  in  existing  conditions,  and 
the  tuft  hunters  who  prefer  foreign  methods  to  anything  American. 
never  fail  of  occupation.  At  the  last  session  of  Congress,  which 
was  not  very  prolific,  no  less  than  twenty-one  bills  aiming  to  change 
our  currency  were  introduced.  If  not  one  was  passed,  every  pro- 
ject sought  to  unsettle  in  some  way  existing  conditions.  This 
threat  of  instability  is  one  of  the  penalties  of  the  great  blessings 
of  free  speech  and  unstinted  right  of  petition.  The  day  must  have 
its  shadow  as  well  as  its  sunshine. 

The  confession  that  weak  links  can  be  found  in  our  financial 
chain  shall  not  drive  us  into  pessimism.  We  know  the  growth  and 
the  reserve  of  strength.   Under  the  act  of  March  14,  1900,  every  dollar 


378   PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

is  equal  to  every  other  dollar,  and  all  are  interchangeable.  Because 
they  arc  most  in  use  among  all  the  people  everywhere  the  small 
notes  are  in  greatest  demand.  If  conditions  point  at  all  to  a  pre- 
mium, the  ones,  twos,  and  fives  will  command  it  first.  But  the  level 
is  well  maintained.  Whatever  winds  blow  or  storms  beat,  our 
currency  has  a  surface  as  clear  and  even  as  a  mirror.  That  surface 
is  not  of  mercury,  shifting  and  undulating;  it  is  formed  of  the 
minted  gold. 

The  stronghold  of  our  financial  system  is  its  actual  gold,  as  well 
as  our  statutes.  The  world  has  about  $5,500,000,000  of  this  metal, 
of  which  the  United  States  has  in  its  stock  $1,342,422,740.  In  the 
last  reported  year,  the  world  produced  less  than  $300,000,000  of 
which  our  mines  gave  $80,000,000.  Our  treasury  holds  $700,000,- 
000  in  gross,  and  our  banks,  national  and  other,  have  $300,000,000, 
approximately.  So  over  one-fifth  of  all  the  world's  gold  is  in  the 
United  States,  and  the  bulk  of  it  in  the  banks  and  the  treasury. 
The  increase  in  gold  in  both  forms  in  our  currency  in  five  years 
has  been  just  less  than  $300,000,000  ($299,853,457),  and  in  the  last 
year  from  August  1  to  August  1,  $137,727,920.  The  charge  is 
put  forth  often  in  spirit,  and  sometimes  in  words,  that  we  are  ex- 
travagant and  wasteful  in  the  possession  of  so  much  of  the  precious 
metal.     Are  we? 

A  leading  financial  journal  of  this  city  quotes  the  president  of 
one  of  the  largest  banks  in  San  Francisco  as  alleging  that  it  costs 
$20  to  get  a  dollar  of  gold  out  of  the  ground.  Was  the  metal  all 
that  the  picks  of  the  miners  and  their  self-sacrifice  took  out  of  the 
earth?  Did  not  the  argonauts  of  1849  and  their  successors  create 
the  California  of  to-day?  The  ranches,  the  orchards,  the  wheat 
and  the  fruit,  the  factories  and  shipyards,  the  cities,  the  churches, 
the  universities,  the  civilization  of  that  prosperous  commonwealth, 
are  a  part  of  the  harvest  planted  by  that  $20  of  the  miners. 

A  writer  in  the  Nineteenth  Century  alleges  that  in  Australia 
the  balance  in  gold  mining  has  been  adverse,  and  in  the  same  re- 
view we  read  that  on  the  whole  gold  discoveries  have  not  been  of 
use.  For  all  fields  response  may  be  given  on  the  same  lines  as 
for  California.  Is  not  California  now,  is  not  Australia,  worth  all  it 
cost?  But  we  are  not  studying  whether  gold  prospecting  or  gold 
mining  as  an  industry  is  profitable  or  the  reverse.     Loss  may  befall 


BANKING  REFORM  AND  CURRENCY  SECTION  379 

the  miners  in  direct  results,  and  yet  by  extending  population, 
opening  up  new  districts,  creating  new  centers  of  production,  they 
may  add  largely  to  the  welfare  of  mankind. 

Quite  another  question  is  whether  the  supply  of  yellow  metal  in 
this  country  and  in  the  world  is  in  excess.  That  problem  is  impor- 
tant and  far-reaching.  We  are  to  note  that  gold  here  is  in  the  ratio 
of  44.9  to  the  total  currency,  while  in  Great  Britain  it  is  70 ;  in  France, 
62.12;  in  Germany,  66.10;  in  Russia,  87.71,  and  in  Austria-Hun- 
gary, 68.90.  In  all  these  countries  combined,  gold  is  69.6  to  the 
total  circulation.  If  the  world's  experience  is  to  be  accepted  our 
gold  is  not  in  excess,  although  our  whole  volume  of  money  may  be 
too  great.  Gold,  whether  in  coin  or  certificates,  becomes  elastic 
as  currency  just  to  the  extent  that  it  comes  to  the  treasury  and  goes 
out  from  the  vaults.  This  counter-flow  has  no  limit  save  the  opera- 
tions of  trade.  No  payments  or  deposits  in  this  form  will  be  re- 
jected, and  the  treasure  will  be  held  intact  until  the  public  use 
draws  it  out.  Coin  and  certificates  are  interchangeable,  and  elas- 
ticity may  assert  itself  to  any  degree.  Our  total  circulation  per 
capita  at  $31.06,  exceeds  that  of  every  other  nation  save  France, 
where  it  is  $39.22.  But  our  industry  and  enterprise  and  local  traffic 
also  lead  in  the  comparison.  The  question  is  giave  whether  our  cur- 
rency is  not  in  excess  of  our  needs. 

American  finance  connects  itself  with  world  movements.  While 
we  cannot  follow  the  debate  relative  to  the  profit  of  gold  mining, 
we  must  recognize  the  fact  that  among  the  great  commercial  nations 
the  yellow  metal  is  the  only  instrument  for  the  final  adjustment 
of  trade  differences.  The  experience  of  mankind  has  chosen  it 
for  that  purpose,  and  there  is  no  other  instrument  available.  A 
few  countries  still  cling  to  silver,  but  they  all  show  signs  of  adopt- 
ing the  richer  metal.  Thus  gold  becomes  more  masterful.  Those 
who  put  themselves  in  hostile  array,  denounce  it  as  costly,  and 
doubt  the  value  of  discovery  and  production,  are  bound  to  pro- 
vide, at  least  in  theory,  some  other  tool  for  settling  the  world's 
commerce.  The  era  of  rude  barter  has  passed  away.  The  stress 
of  trade  insists  upon  the  best  machinery. 

In  the  last  fifteen  years  we  exported  in  gold  $890,231,329,  and 
imported  $845,452,765.  From  1890  to  T896,  inclusive,  every  year 
showed  an  excess  of  exports  to  an  aggregate  of  $273,961,117.     In 


SSo    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

only  two  years  since  then,  1900  and  1903,  were  the  exports  greater 
than  the  imports,  $5,802,143  in  all;  while  in  the  other  years  of  the 
period  the  imports  were  $234,984,696  in  excess.  In  the  last  fiscal 
year,  in  spite  of  exceptional  foreign  payments,  the  imports  surpassed 
the  exports  by  $17,595,382.  So  the  exports  for  the  whole  period 
were  the  greater  by  $44,778,564,  and  this  is  only  equal  to  our  own 
production  of  the  metal  for  seven  months.  More  significant  still, 
it  is  only  5  per  cent,  of  the  outward  movement  for  the  period. 

Yet  the  full  sums  of  imports  and  exports  were  carried  across 
the  ocean  at  great  risk,  heavy  cost  for  freight,  and  not  a  little  loss 
by  abrasion.  Why  should  this  treasure  be  carted  back  and  forth 
between  nations,  as  the  banks  of  this  and  other  cities  used  to  de- 
liver money  to  each  other?  Is  it  not  possible  to  frame  a  system 
by  which  only  the  differences  may  be  paid  in  metal  at  proper  inter- 
vals? Surely  it  would  be  cheaper  to  pay  the  balances  than  the 
gross  sums,  as  the  clearing  houses  daily  testify. 

Why  cannot  an  international  clearing  house  be  Organized  ?  Per- 
haps jealousy  will  forbid  the  selection  of  a  single  city  for  the  purpose, 
as  the  Greek  cities  were  rivals  for  the  deposit  of  the  offerings  to 
Apollo.  The  international  organization  may  well  have  its  vaults  in 
London,  Paris  and  Berlin,  as  well  as  in  New  York,  and  the  treasure 
can  be  divided  in  the  ratio  of  the  gold  of  the  several  countries.  The 
certificates  of  the  four  vaults  can  be  interchangeable.  The  bar- 
barism of  shipping  kegs  of  metal  east  and  west  over  the  Atlantic 
may  go  with  the  method  of  the  mummies  and  the  cave-dwellers. 

American  finance  does  not  stand  alone,  a  Teneriffe  in  mid-ocean, 
a  Shasta  or  Ranier  or  Mont  Blanc  rising  in  solitary  majesty  among 
their  ranges.  It  is  the  vital  current  of  the  activity  of  the  people. 
Its  strength  is  not  in  theory  or  in  petty  technicalities.  It  is  strong 
with  the  brain  and  brawn  of  82,000,000  citizens ;  with  the  varied 
resources  of  mine  and  soil  and  forest  and  running  waters;  with 
the  sheep  and  horses  on  many  ranches  and  the  cattle  on  a  thousand 
hills ;  with  coal  and  iron  and  all  their  products ;  with  wheat  and 
corn  and  sugar  and  cotton ;  with  the  inventive  minds  and  skillful 
fingers  of  efficient  artisans;  with  forge  and  factory  and  dynamo 
and  motor;  and  not  least  with  school  and  college,  with  university 
and  church.  Financial  strength  is  in  wealth  of  every  kind,  but  not 
less  in  the  purest  morality  and  the  worthiest  character. 


BANKING  REFORM  AND  CURRENCY  SECTION  381 

THE  BANK   AND   THE  TREASURY— THE  TWO   GREAT 
PILLARS    SUPPORTING   OUR   FINANCIAL    SYSTEM 

ADDRESS  DELIVERED  BY  FREDERICK  A.  CLEVELAND,  PH.D.,  PROFESSOR  OF  FINANCE 
IN  THE  SCHOOL  OF  COMMERCE,  ACCOUNTS,  AND  FINANCE,  NEW  YORK  UNI- 
VERSITY, BEFORE  THE  PENNSYLVANIA  BANKERS'  ASSOCIATION,  AT  ATLANTIC 
CITY,   OCTOBER,    IOO4. 

A  century  of  adaptation  to  new  and  ever-changing  social  and 
industrial  conditions  has  given  to  America  some  remarkable  insti- 
tutions. In  none  is  the  strenuous  character  of  the  people  more 
strongly  marked  than  in  our  financial  system ;  in  none  have  we 
developed  greater  possibility  for  solidity  and  strength  than  in  those 
concerns  organized  to  supply  the  increasing  demand  for  current 
funds.  Living  amid  great  natural  resources,  hampered  for  lack  of 
capital  and  industrial  equipment,  working  under  conditions  requir- 
ing intensity  of  effort  and  closest  economy,  the  balance  of  prosperity 
has  been  swung  by  two  contending  forces — the  one  working  for 
security  or  protection  in  the  enjoyment  of  wealth  acquired,  the  other 
taxing  present  resources  to  the  utmost  to  make  the  future  conquest 
over  nature  the  more  rapid  and  complete.  An  inventive  people,  we 
have  exercised  our  best  talent  in  devising  ways  and  means  for  doing 
business,  not  on  our  own  capital,  but  on  capital  acquired  in  exchange 
for  credit  or  contracts  for  the  future  delivery  of  money.  The  result 
has  been  at  times  to  carry  investment  judgment  beyond  all  reason- 
able possibility  of  safe  return. 

Nor  is  this  situation  an  unnatural  one.  With  teeming  riches 
awaiting  only  the  application  of  capital  for  their  recovery,  induce- 
ment to  promotion  and  credit  investment  has  been  great.  But  pro- 
spective money  returns  have  not  always  been  realized  within  the  term 
of  a  loan,  and  failure  in  judgment  has  resulted  in  inability  to  make 
money  delivery — in  failure  to  meet  credit  obligations.  Such  fail- 
ures, however,  have  not  alone  been  due  to  overestimates  of  the 
industrial  product.  Tn  many  instances  the  rewards  of  nature  have 
surpassed  all  calculation;  but  the  money  returns  required  by  credit 
contracts  have  depended  quite  as  much  on  market  price  as  on 
quantity  or  quality  produced,  and  the  market  has  been  subject  to 
world-conditions  which  the  parties  to  the  contract  could  not  foresee. 
Varying  conditions  of  market  price  men  often  than  those  of  pro- 
duction have  made   necessary   a   wide   margin    of   safety    in   credit 


382    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

investment.  In  each  period  of  increased  world-activity,  of  ad- 
vancing prices,  and  larger  profits,  capital  has  been  more  easily 
obtained  on  credit.  With  each  period  of  world-depression,  capital 
has  become  more  conservative,  forcing  reorganization  and  readjust- 
ment. It  is  out  of  this  struggle  between  the  forces  of  promotion 
and  conservatism  that  our  credit  institutions  have  arisen. 

The  guiding  principle  of  the  American  people  in  the  organiza- 
tion and  control  of  the  institutions  of  current  credit  has  ever  been 
and  is  to-day  to  give  to  capital  the  highest  utility  compatible  with 
safety.  Proceeding  from  this  principle,  alternating  in  their  control 
between  the  forces  of  conservatism  and  those  of  credit  expansion, 
we  have  developed  a  system  which  is  unique — a  system  in  which 
both  our  money  and  our  commercial  funds  are  on  a  credit  base. 

Our  money  is  largely  credit  money,  and  this  is  issued  by  an 
agency  of  central  government  which  has  no  banking  power — the 
United  States  Treasury.  Our  commercial  credit  is  issued  and  con- 
trolled by  private,  locally  independent  institutions — our  commercial 
banks.  More  vividly  to  portray  the  situation  of  our  great  credit 
system,  it  may  be  said  to  be  a  business  device  or  structure  supported 
by  two  independent  pillars ;  the  one  a  column  or  pillar  consisting 
of  $1,500,000,000  of  credit  money,  and  this  resting  on  the  gold 
Treasury  reserves;  the  other  a  column  or  pillar  of  about  $10,000,- 
000,000  of  bank  credit,  resting  on  individual  bank  reserves ;  on 
these  two  great  columns  is  superimposed  from  $30,000,000,000  to 
$60,000,000,000  of  private  business  credit  that  looks  to  the  "sound- 
ness" of  the  credit  of  these  two  institutions  for  support.  The  prob- 
lem of  to-day  is  to  make  this  system  a  safe  one  at  all  times  with 
which  to  do  business ;  to  keep  the  foundations  of  these  two  great 
pillars  sound,  and  at  the  same  time  to  give  to  the  system  itself  ability 
temporarily  to  contract  and  expand  according  to  the  varying  needs 
of  the  country. 

From  the  time  of  the  Resumption  Act  of  1878,  the  credit  money 
system  had  been  growing  gradually  weaker  by  expansion  of  issues. 
In  the  face  of  the  gold-standard  measure  of  1873,  silver  issues  and 
silver  obligations  multiplied.  The  pillar  of  credit  money  was 
allowed  to  increase  in  weight,  and  the  superstructure  which 
rested  upon  it,  without  strengthening  the  Treasury  reserve — its 
foundation.     The     federal     administration     was     made    responsible 


BANKING  REFORM  AND  CURRENCY  SECTION  383 

for  maintaining  the  parity  and  financial  integrity  of  credit  money 
issues  of  government,  while  Congress,  by  legislation  for  silver  in- 
flation, made  the  task  more  difficult.  All  went  well,  however,  till 
1893,  when  failing  revenues  forced  President  Cleveland  to  choose 
between  using  the  loan  power  in  his  hands  to  obtain  gold  to  repair 
the  fast  disappearing  foundation  of  the  credit  money  column,  or 
permitting  the  national  credit  structure  to  collapse.  He  chose  the 
wiser  part — to  maintain  integrity  of  Treasury  issues,  and  to  let  the 
country  decide  whether  or  not  the  gold  standard  should  be  main- 
tained and  the  past  policy  of  credit  inflation  should  be  abandoned. 
The  result  was  a  vote  supporting  the  Gold  Standard  Act  of  1873, 
forcing  a  repeal  of  conflicting  legislation.  By  the  act  of  1900  the 
gold-standard  reserve  was  broadened  and  strengthened,  placing 
practically  all  the  resources  of  the  nation  at  the  command  of  the 
treasurer,  if  need  be,  to  protect  the  financial  integrity  of  the  cur- 
rency. 

With  each  recurring  period  of  financial  strain  the  soundness  of 
our  institutions  of  commercial  credit  has  been  brought  to  a  test. 
Under  the  National  Bank  Act  these  have  proved  quite  as  sound  as 
the  banks  of  other  countries,  but,  as  with  them,  "soundness"  has  ever 
been  at  the  expense  of  "elasticity"  in  commercial  accommodation. 
While  the  banks  have  shown  themselves  able  to  take  care  of  them- 
selves, it  has  many  times  happened  that  their  customers  have  been 
deprived  of  much-needed  funds.  It  is  generally  admitted  that  our 
commercial  banks  have  not  been  able  to  meet  the  varying  needs  of 
business  for  current  "cash."  The  great  financial  issue  before  the 
country  to-day  is,  How  can  we  further  adapt  our  currency  and 
banking  system  to  the  fluctuating  business  demand?  It  is  with 
reference  to  this  question  that  the  bank  and  Treasury — upon  whose 
reserves  the  two  great  pillars  of  our  system  rests — will  be  discussed. 

Any  intelligent  consideration  of  the  problem  of  elasticity  must 
proceed  from  inquiry  as  to  the  amount  of  adaptation  required.  As 
to  this  we  may  never  have  complete  data.  Fortunately,  however, 
we  have  reports  and  statistics  from  which  a  safe  approximation  may 
be  reached.  The  Treasury  Department  publishes  statistics  of 
changes  in  money  circulation.  Federal  and  state  reports  also  give  a 
fair  view  of  public  fiscal  needs.  We  have  data  that  are  considered 
reliable  with  reference  to  the  increased  and  decreased  money  supply 


384  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

by  importation  and  exportation,  by  issue  and  redemption.  The 
national  and  state-bank  reports  give  us  a  reliable  basis  for  judg- 
ment as  to  the  increasing-  and  decreasing  demands  for  credit  funds 
and  for  money  as  a  means  of  payment.  The  Comptroller  of  the 
Currency  has  also  made  several  inquiries  with  reference  to  the  daily 
averages  of  deposits  and  withdrawals  from  banks  by  months. 

From  Treasury  statistics  it  is  found  that  the  greatest  variation 
in  money  circulation  within  a  period  of  a  single  year  since  1890, 
allowing  for  the  average  rate  of  increase,  is  $244,000,000,  or  about 
10  per  cent,  of  the  total  national  money  supply.  It  would  seem, 
therefore,  that  the  fluctuation  in  the  total  money  supply  of  the 
country  is  not  a  serious  matter — that  this  increasing  and  decreasing 
need  in  the  future,  as  in  the  past,  may  readily  be  met  through  the 
present  agencies  of  "issue"  and  of  ''importation."  But  the  fluctua- 
tions in  total  national  money  demand  as  compared  with  total  national 
money  supply  are  not  as  significant  as  are  the  variations  of  supply 
and  demand  between  the  several  financial  groups  within  the  nation. 
With  our  present  monetary  statistics  demands  between  financial 
sections  and  groups  may  be  completely  lost  sight  of.  For  example, 
within  a  period  of  a  year  the  Treasury  may  show  a  monetary  loss 
of  $250,000,000,  while  the  bank  reserves  may  show  a  gain  of  equal 
amount.  These  fluctuations  would  not  in  any  manner  affect  the 
total  money  supply  of  the  country.  Again,  the  banks  may  lose 
$250,000,000  from  their  reserves  and  the  money  in  circulation 
among  the  people  may  increase  in  like  amount.  Such  fluctuations 
would  be  lost  sight  of  in  an  exhibit  of  national  supply  and  demand. 
Nevertheless  these  are  the  fluctuations  in  supply  and  demand  which 
every  year  rise  up  before  the  thoughtful  banker  like  a  nightmare. 

Giving  consideration  first  to  the  fluctuations  in  current  money 
demands  of  the  Treasury,  the  widest  variation  from  the  average 
increase  in  fiscal  needs  during  the  last  fifteen  years  has  been  $160,- 
000,000.  This  amount  is  well  within  the  customary  money  balances 
of  the  Treasury.  But,  assuming,  as  now  happens,  that  money  de- 
mands on  the  Treasury  may  increase  while  the  revenues  are  de- 
creasing, this  Treasury  balance  may  be  threatened  with  extinction. 
Nevertheless,  the  problem  of  adjustment  of  Treasury  resources  to 
Treasury  needs  in  itself  is  not  a  factor  disturbing  to  business  Through 
the  ample  loan  powers  of  the  Treasury,  money  may  be  obtained  by 


BANKING  REFORM  AND  CURRENCY  SECTION  385 

importation  at  any  time  that  a  money  surplus  in  the  vaults  of  banks 
is  not  available.  It  is  only  when  the  American  money  rate  is  low, 
when  the  money  stock  of  private  institutions  is  so  large  that  they 
can  afford  to  sell  at  rates  far  below  the  usual  commercial  rate, 
that  the  fiscal  needs  of  the  Treasury  will  be  supplied  from  the  banks. 
In  other  words,  when  the  government  is  forced  on  the  world's  mar- 
ket to  obtain  funds  for  its  own  needs,  importation  will  serve  to 
strengthen  the  national  money  market.  When  loans  are  taken  in 
America,  such  investment  serves  to  deter  speculative  excesses  co- 
incident with  a  large  private  surplus.  The  monetary  disturbances 
that  in  the  past  have  arisen  from  Treasury  needs  have  been  due  to 
threatened  attack  on  the  financial  integrity  of  credit  issues,  or  to  the 
calling-in  of  loans  previously  made  by  the  Treasury  to  the  banks. 
The  purely  fiscal  transactions  of  the  Treasury  have  served  to 
strengthen  rather  than  to  weaken  our  institutions  of  private  credit. 

The  only  fluctuations  in  money  demands  that  are  serious,  and 
therefore  the  only  ones  which  from  the  standpoint  of  elasticity 
demand  consideration,  are  those  made  by  the  banks  themselves  as  a 
means  of  supporting  their  own  credit  accounts,  and  those  made  by 
the  people  for  "till  cash"  and  pocket  money.  These  two  demands 
may  be  treated  as  practically  the  same,  since  the  method  by  which 
money  is  obtained  by  the  people  when  in  need  of  cash  is  directly  or 
indirectly  to  draw  on  the  banks.  The  purpose  of  selling  commercial 
paper  or  other  bankable  assets  to  a  bank  is  to  obtain  current  funds 
for  use  in  business.  Under  ordinary  circumstances  a  customer  pre- 
fers his  current  funds  in  the  form  of  a  bank  account,  but  when 
occasion  requires,  the  bank  may  be  asked  by  the  customer  to  pay  its 
account,  and  this  money  is  withdrawn  from  the  banking  reserves. 
The  banks  stand  in  the  position  of  a  money  market  to  the  people. 
The  banking  business  is  one  of  selling  money  "short,"  and  then 
making  delivery  "on  demand."  It  is  through  the  process  of  making 
delivery  on  these  short  sales  of  money,  by  the  banks  to  the  people, 
that  the  money  reserves  of  banks  are  depleted. 

The  largest  fluctuation  in  average  increase  or  decrease  of  re- 
serves of  national  banks  during  the  last  fifteen  years  was  $155,000,- 
000.  This  was  under  conditions  of  extreme  monetary  disturbance 
and  a  general  condition  of  doubt,  which  in  many  localities  amounted 
to  actual  panic.     Assuming  that  this  fairly  represents  the  maximum 

25 


386  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

fluctuation  in  money  demands  on  national  banks,  and  (since  the  na- 
tional banks  are  depositories  for  private  banks,  state  banks,  and 
trust  companies)  assuming  that  the  demands  made  on  other  bank- 
ing institutions  would  not  be  larger  in  proportion  to  their  capitali- 
zation, the  extreme  fluctuation  in  money  demands  made  by  all 
banking  institutions  would  not  exceed  $375,000,000.  This,  there- 
fore, may  be  taken  as  the  degree  of  elasticity  required  in  the  money 
circulation  to  meet  the  needs  of  banks,  and  through  the  banks  to 
meet  the  needs  of  the  public. 

Turning  to  the  question  of  elasticity  for  which  provision  is  to  be 
made  in  the  other  form  of  funds  used  by  the  business  community — 
viz.,  bank  accounts — the  same  process  of  reasoning  may  be  followed. 
Taking  the  statistics  of  national  banks  for  the  last  five  years  as  a 
basis  for  calculation,  the  largest  variation  from  the  average  increase 
or  decrease  recorded  within  fifteen  years  has  been  about  $350,000,- 
000.  This  variation  also  occurred  under  circumstances  of  great 
financial  stress — circumstances  not  only  of  doubt  as  to  the  paying 
ability  of  the  banks  themselves,  but  also  of  doubt  as  to  the  ability 
of  the  government  to  maintain  gold  payments  on  the  credit-money 
used  by  the  banks  for  reserves.  These  circumstances  may  never 
again  obtain.  Assuming  that  this  extreme  variation  may  be  taken 
as  a  safe  basis  for  estimate  of  the  maximum  fluctuation  in  demand 
for  national  bank-credit  accommodation,  the  extreme  variation  to  be 
provided  for  by  the  system  would  be  about  $875,000,000,  or  about 
20  per  cent,  of  the  average  amount  of  bank-credit  at  the  time  out- 
standing. 

Again  going  to  the  statistics  of  average  daily  fluctuation  in  de- 
posits and  withdrawals  by  months,  a  somewhat  better  basis  for 
calculation  may  be  found  within  narrower  periods  of  time.  From 
the  investigation  made  in  1903,  it  would  appear  that  the  average 
daily  demand  made  on  national  banks  is  about  $226,000,000. 
That  this  average  daily  demand  by  months  fluctuated  from  $200,- 
000,000  per  day  to  $258,000,000 — in  other  words,  from  the  month 
of  January  to  the  month  of  August  1903,  there  was  a  fluctuation 
of  nearly  $60,000,000  in  the  daily  averages.  It  also  appears  that 
the  total  amount  of  funds  provided  in  the  form  of  bank  accounts 
changes  hands  on  the  average  about  once  in  fifteen  days — that 
is,  that  the  average  length  of  time   for  which   the  business  man 


BANKING  REFORM  AND  CURRENCY  SECTION  387 

provides  current  funds  needful  to  his  business  is  about  half  a  month. 
Assuming  that  $60,000,000  is  a  maximum  fluctuation  in  the  daily 
averages  of  demands  on  national  banks  for  credit  accommodation, 
and,  further,  that  the  active  accounts  of  all  commercial  banking 
institutions  is  equal  to  about  $6,000,000,000 ;  assuming,  again,  that 
the  fluctuations  in  other  institutions  are  in  like  proportion  to  those 
in  national  banks,  and  that  the  average  period  for  which  provision 
is  to  be  made  is  fifteen  days,  this  would  give  a  maximum  fluctuation 
in  current  demand  for  loans  when  the  banks  are  able  to  supply  all 
demands  amounting  to  about  $1,800,000,000,  or  about  30  per  cent, 
of  the  active  accounts  outstanding.  This  would  seem  to  be  an  ex- 
treme estimate  as  to  elasticity  in  bank  credit  accounts  required. 

With  both  the  system  and  the  elasticity  required  of  the  system 
before  us,  we  are  in  a  position  to  consider  how  the  two  great  insti- 
tutions which  make  up  the  system  may  the  better  be  used  to  retain 
the  quality  of  structural  soundness  which  it  has  acquired  by  a 
century  of  national  education  and  legislation,  and  at  the  same  time 
to  enable  them  to  meet  the  fluctuating  business  demand  for  funds 
both  in  the  form  of  money  and  in  the  form  of  bank  accounts  in 
such  quantities  as  may  profitably  be  used.  That  the  Treasury  can- 
not provide  the  people  with  credit  funds  goes  without  saying. 
Even  money  demands  cannot  be  supplied  by  the  government  except 
through  loans.  Through  obtaining  loans  is  the  only  way  in  which 
the  fluctuating  business  demands  can  be  met  under  any  financial 
system.  In  France  and  Germany — in  fact,  wherever  the  govern- 
ment is  also  a  banker — loans  may  be  made  to  the  people  direct. 
But  under  such  a  system  as  ours,  in  which  the  government  has  no 
institution  of  commercial  credit,  the  only  manner  in  which  the 
government  can  come  to  the  support  of  the  market  is  through  banks 
owned  and  controlled  by  private  parties. 

Since  both  the  money  demand  and  the  credit  demand  fall  im- 
mediately on  the  banks,  it  is  to  these  that  we  must  look  for  the 
means  necessary  to  supply  both  money  and  credit  to  the  people. 
Under  the  American  system,  how  may  the  banks  the  better  supply 
the  fluctuating  money  and  credit  demands,  and  how  may  the 
Treasury  best  lend  support  to  the  banks  without  weakening  its  sup- 
port to  the  credit-money  issues  of  the  government?  The  new  re- 
lation proposed,  and  which  finds  many   advocates  among  national 


388    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

bankers,  is  "that  the  Treasury  be  required  to  deposit  all  surplus 
funds  in  the  banks  over  and  above  the  currency  requirements." 
The  reason  urged  in  support  of  this  proposition  is  "to  prevent  the 
money  of  the  country  being  locked  in  the  public  vaults." 

In  opposition  it  is  said  that  the  reasoning  by  which  the  above 
conclusion   is   reached  proceeds  from  two   fallacies :    first,  that  the 
money  held  by  the  Treasury  is  abstracted  from  the  money  stock  of 
the  country,  and  therefore  operates  to  cripple  business ;  and,  second, 
that  greater  elasticity  would  be  given  to  bank  credit  by  having  the 
revenues    of    government    deposited    in    commercial    banks.      The 
popular  notion  that  money  in  the  vaults  of  the  government  is  ab- 
stracted   from    the    money    stock    "of    the    country"    is    erroneous. 
Assuming  that  $150,000,000  were  the  average   reserve  carried  in 
the  Treasury,  that  $100,000,000  were  the  average  money  reserve  car- 
ried in  the  vaults  of  the  several  state  and  local  treasuries,  this  aver- 
age reserve,  amounting  to  $250,000,000  would  be  taken,  not  out  of 
the  money  stock  available   for  business  in  the  United   States,  but 
out  of  the  money  stock  of  the  world.     If  originally  the  Treasury 
reserves  had  been  suddenly  abstracted  from  circulation  in  the  United 
States   by   business   necessity,   this    would    soon    become    equalized 
through  gold  importation ;  and  after  an  equilibrium  had  thus  been 
established,  this  reserve  would  no  longer  be  a  factor  in  the  money 
market.     Only  the   fluctuations  or  variations  in  this  Treasury  re- 
serve is  to  be  considered  as  reaching  the  exchanges.     An  increase 
in  Treasury  reserves  would  operate  to  decrease  the  supply  for  other 
purposes ;  conversely,  a  decrease  in  physical  money  surplus  would 
operate  to  increase  the  supply  outside  of  the  Treasury.     The  effect 
of  this  increase  or  decrease,  it  is  true,  would  first  be  felt  by  persons 
or  institutions  of  first  contact ;  but  should  the  amount  of  the  in- 
crease or  decrease  affect  the  current  funding  needs  of  these  persons 
or  institutions  of  first  contact,  the  supply  or  demand  would  soon 
be  passed  on  through  the  market  and  the  equilibrium  again  restored. 
The  so-called  locking  up  of  reserves  in  the  United  States  Treasury 
is  more  a  matter  of  public  concern  for  the  people  of  Europe  than 
it  is  for  the  people  of  the  United  States,  since  it  may  by  us  be 
used  as  a   relief  fund  when  needed,   while  others  have  no  direct 
control  over  it. 

The  second  fallacy  is  quite  as  apparent.     To  make  the  commer- 


BANKING  REFORM  AND  CURRENCY  SECTION  389 

cial  bank  the  recipient  or  depository  of  government  funds,  when  the 
government  itself  is  out  of  the  banking  business,  cannot  add  to  the 
elasticity  of  bank  credit.     If  the  government  deposits  were  to  be 
kept  at  a  uniform  amount,  this  amount  would  soon  become  absorbed 
in  business,  and  the  bank  reserves  would  soon  become  reduced  to  the 
usual  working  proportion.     Whenever  an  extraordinary  demand  for 
money  or  for  credit  funds  arises,  the  bank  would  be  in  no  better 
position  to  meet  this  demand  than  before.     But  the  revenues  and 
expenditures  of  government  are  not  uniform.     Were  the  revenue 
receipts  and  payments  to  be  made  through  the  banks,  and  the  banks 
made  the  depositories  of  the  government,  this  would  be  an  increas- 
ing cause  of  monetary  and  credit  disturbance,  since  it  often  happens 
that  the  banks  are  hardest  pressed,  and  are  required  to  keep  the 
largest  money  reserves  for  their  own  protection,  when  the  expenses 
of  government  are  in  excess  of  the  revenues  and  the  Treasury  sur- 
plus is  running  low.     If  the  banks  had  been  the  fiscal  agents  of 
government  within  the  last  year,  it  not  only  would  have  been  neces- 
sary for  them  to  have  paid  for  the  Panama  Canal  purchase,  and  to 
have  arranged  for  the  other  extraordinary  payments,  but  they  also 
would  have  been  required  to  meet  a  deficit  of  $14,700,000  in  cur- 
rent revenues.     That  is,  this  much  of  the  government  surplus  must 
have  been  withdrawn  from  the  banks  as  a  means  of  protecting  its 
own   credit.     Such   an   alliance  between   the   government   and   the 
banks  would  have  reduced  rather  than  increased  elasticity  in  the 
system. 

So  long  as  the  government  remains  out  of  the  banking  busi- 
ness, the  greatest  elasticity  obtainable  must  come  through  the  col- 
lateral support  which  an  independent  treasury  may  be  able  to  give 
to  independent  commercial  banks.  The  fact  that  the  national  Treas- 
ury carries  in  its  vaults  from  $100,000,000  to  $250,000,000  of  money 
over  and  above  its  currency  requirements,  and  that  this  may  be  kept 
free  for  collateral  support  to  the  banks,  suggests  one  of  the  ways 
in  which  the  government  may  aid  the  banks  to  meet  an  increased 
money  demand,  and  at  the  same  time  may  permit  the  banks  to  in- 
crease their  credit  accounts  to  customers.  It  usually  happens  that 
the  Treasury  surplus  becomes  largest  in  periods  of  low  money  de- 
mands—time- when  the  banks  are  giving  an  inordinate  expansion  to 
their  credit.     For  example,  from  June  30,  [899,  to  June  30,  1902,  the 


3»H> 


PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 


ordinary  receipts  of  the  Treasury  exceeded  the  ordinary  disburse- 
ments by  $245,000,000.  During-  the  same  period  the  bank  credit 
of  the  country  expanded  about  $2,000,000,000.  If  the  government 
had  deposited  this  excess  in  the  banks  it  would  have  still  farther 
enhanced  speculation  and  made  the  credit  situation  the  more  diffi- 
cult to  support  after  a  climax  had  been  reached.  From  June  30, 
1902,  to  June  30,  1904,  the  ordinary  receipts  of  the  Treasury  ex- 
ceeded the  ordinary  expenditures  by  only  $12,000,000,  and  during 
the  last  year  there  was  an  actual  deficit  of  $41,700,000.  This  fall- 
ing-off  of  government  revenues  was  coincident  with  great  financial 
pressure  on  the  banks.  To  have  put  the  government  in  a  position 
where  it  had  been  necessary  to  throw  this  burden  of  decreasing 
revenue  on  the  bank  would  have  meant  certain  ruin  to  commercial 
credit. 

The  net  result  of  the  independent  treasury  system  during  the 
years  referred  to  has  been  to  bring  into  the  United  States  in 
time  of  greatest  prosperity,  and  to  keep  here  during  a  period  of 
credit  expansion,  at  least  $200,000,000  in  gold,  which,  if  placed  in 
the  vaults  of  banks,  would  doubtless  have  caused  still  greater  credit 
expansion,  and  at  the  same  time  would  have  set  up  an  exportation 
of  gold.  Even  if  no  financial  aid  had  been  given  to  the  banks  by 
the  Treasury,  the  result  of  the  operation  of  the  independent  system 
would  have  been  beneficial.  The  same  effect  may  be  traced  through 
the  recurring  periods  of  credit  expansion  and  credit  retraction  since 
the  Civil  War. 

But  the  history  of  the  last  two  or  three  years  teaches  a  lesson 
which  should  never  be  forgotten  by  the  banks.  When  the  effects 
of  speculative  loans  caused  credit  reaction,  and  business  conserva- 
tism began  to  demand  settlement  of  contracts  of  money  delivery, 
and  when  increased  pressure  was  brought  upon  the  banks  for  pay- 
ment, this  would  doubtless  have  proved  ruinous,  not  only  to  the 
banks,  but  also  to  the  commercial  and  industrial  interests  of  the 
whole  nation,  had  not  the  national  Treasury  responded  to  pleas  for 
aid  from  commercial  credit  institutions.  A  volume  of  credit  has 
been  piled  up  which  was  too  great  for  the  banks  to  support  with 
their  present  capitalization.  The  crumbling  foundation  of  bankers' 
reserves,  a  considerable  portion  of  which  was  borrowed,  would 
doubtless  have  gone  from  under  and  given  way  to  financial  stress. 


BANKING  REFORM  AND  CURRENCY  SECTION  391 

or  the  burden  of  supporting  them  been  thrown  on  the  banks'  cus- 
tomers in  their  efforts  to  save  themselves,  had  not  the  government 
transferred  over  $100,000,000  to  their  support.  Had  the  prescrip- 
tion above  referred  to,  and  usually  given  as  a  remedy  for  financial 
weakness,  been  followed,  had  the  government  previously  deposited 
its  surplus  in  the  banks  during  those  years  of  so-called  prosperity, 
instead  of  giving  to  the  great  national  credit  structure  stability 
and  power  of  endurance,  it  would  have  had  the  effect  of  adding 
nothing  to  the  capital  or  to  the  relative  strength  of  the  banks;  it 
would  have  been  received  and  used  by  the  banks  in  lieu  of  capitali- 
zation; it  would  have  made  the  superstructure  still  more  top-heavy 
— would  have  placed  the  system  beyond  all  possible  remedial  aid 
without  a  long  period  of  reorganization  and  readjustment  of  credit 
relations  to  paying  ability. 

The  independent  Treasury  gives  to  the  American  system  a 
strength  that  is  not  attainable  under  any  of  the  much-lauded  foreign 
financial  devices.  The  fact  is  that  we  have  not  used  the  independent 
Treasury  to  its  highest  advantage.  The  deposits  made  by  the  gov- 
ernment with  banks  are  loans  without  interest.  So  long  as  the 
government  does  not  call  these  loans  there  is  no  inducement  for 
the  banks  to  pay  them.  On  three  different  occasions,  from  1899 
to  1903,  the  Treasury  has  helped  the  banks  to  support  their  financial 
burdens.  In  each  case  the  strain  upon  them,  the  so-called  inelastic- 
ity, was  due  to  an  over-issue  of  their  own  credit,  and  to  inability 
to  make  the  money  payments  demanded  without  a  violent  con- 
traction in  credit  accommodation.  The  government  has  stepped 
in  to  prevent  this  contraction.  But  when  the  stress  was  past, 
what  then?  Did  the  government  again  gradually  repossess  itself 
of  the  moneys  gratuitously  loaned?  Has  it  again  reclaimed  the 
means  by  which  assistance  was  rendered  ?  No ;  following  just 
such  reasoning  as  has  been  quoted,  the  loans  remained  with  the 
banks  still  without  interest.  The  Treasury  was  able  again  and 
again  to  come  to  the  relief  of  the  banks  by  reason  only  of  its  con- 
stantly increasing   surplus. 

The  weakness  in  the  situation  lies  in  the  failure  of  the  banks 
to  reduce  their  temporary  loans  from  the  government  when  the 
emergency  is  past,  and  in  the  Treasury's  failing  to  call  in  its  de- 
mand loans  when  the  reserves  of  the  banks  become  adequate  to 


392  PRACTICAL  TROBLEMS  IN  BANKING  AND  CURRENCY 

support  their  credit.  In  July  and  August  the  hank  reserves  piled 
up  till  they  wore  becoming  a  source  of  possihle  weakness.  When 
the  Panama  Canal  purchase  was  to  be  settled  for,  when  the  govern- 
ment revenues  began  to  fall  off,  instead  of  demanding  a  return  of 
loans  to  the  banks,  and  thus  reducing  the  large  surplus  reserves 
which  the  hanks  had  accumulated  and  of  which  they  were  com- 
plaining, the  government  preferred  still  further  to  reduce  the  re- 
serves in  its  Treasury  vaults,  calling  on  the  banks  for  only  such  an 
amount  as  seemed  necessary.  During  the  month  of  September 
there  was  a  gradual  withdrawal  of  bank  reserves  to  supply  the 
business  need.  Under  circumstances  of  weakening  bank  reserves 
and  of  gradually  decreasing  revenue  of  government,  with  the  con- 
sequent disappearing  of  the  Treasury  surplus,  the  banks  may  not  only 
be  deprived  of  collateral  aid  in  time  of  financial  stress,  but  may  be 
required  even  still  further  to  weaken  their  money  reserves  by  mak- 
ing payments  to  the  government.  Under  such  circumstances,  the 
banks  would  be  left  to  their  own  resources,  with  the  government 
money  demand  as  well  as  the  public  money  demand  to  supply. 
The  result  would  be  that  in  their  own  protection  the  banks  would  be 
forced  to  contract  business  accommodation  in  such  a  way  as  to  make 
the  present  practice  positively  dangerous. 

At  no  time  in  the  history  of  banking  were  the  time  and  circum- 
stances more  opportune  for  Treasury  support  to  banks  than  in 
1902  and  1903.  At  no  time  in  our  history  might  the  Secretary 
more  wisely  have  withdrawn  the  government  deposits  than  in  July 
and  August,  1904,  when  the  money  reserves  were  piling  up  in  the 
vaults  of  the  banks.  The  effect  of  failure  to  do  this  has  been  two- 
fold :  ( 1 )  the  cheapness  of  money  has  caused  an  exportation  of 
gold;  (2)  the  low  rate  of  call  loans  has  caused  speculation.  In 
September  we  have  had  the  result  made  apparent — a  concurrent 
flow  of  money  to  the  interior  and  abroad,  and  at  the  same  time  an 
increase  in  speculative  activity.  Thus  we  again  have  a  period  of 
increasing  credit  expansion  and  decreasing  bank  reserves.  These 
movements  have  not  proved  threatening,  it  is  true,  but  there  seems 
at  least  a  possibility  that  the  banks  may  again  call  on  the  Treasury 
for  collateral  aid  before  another  season  is  past,  and  under  conditions 
which  would  require  the  Treasury  to  turn  a  deaf  ear.  Following  a 
practice  by  which  the  government  loans  its  surplus  to  the  banks 


BANKING  REFORM  AND  CURRENCY  SECTION 


393 


without  interest  or  at  a  rate  below  the  market,  the  continued 
aid  of  the  Treasury  to  the  banks  may  depend  on  the  exercise  of 
discretion  by  the  Secretary.  If,  however,  the  government  were  to 
charge  the  bank,  not  an  exorbitant  rate,  as  would  a  money-lender 
in  time  of  stress,  but  the  usual  commercial  rate,  the  banks  would 
promptly  return  the  loan  when  money  falls  below  the  usual  price. 
No  longer  would  it  be  the  marvel  of  European  bankers  that  the 
call  money  rate  may  within  a  day  rise  to  phenomenal  heights. 
While  the  government  was  in  the  attitude  of  offering  to  loan  at 
five  per  cent,  the  rate  could  not  rise  far  above  this  figure.  In 
either  case,  whether  by  exercise  of  official  discretion  or  by  charg- 
ing a  rate  which  would  make  the  restoration  of  reserves  autonomous, 
the  Treasury  support  to  the  system  would  not  be  weakened.  On 
the  other  hand  the  money  market  would  be  steadied. 

But  even  if  the  Treasury  never  had  a  surplus  to  loan  to  the 
banks  in  periods  of  emergency,  we  have  in  our  present  system 
possibilities  for  increasing  circulation  for  current  needs  that  are 
not  inherent  in  foreign  systems.  This  is  in  the  so-called  issues 
of  banks.  If  the  bank  has  unencumbered  resources  (mind  you, 
unencumbered  resources)  necessary  to  obtain  a  government  "de- 
posit loan."  these  same  resources  may  be  pledged  for  a  loan  from 
the  government  in  the  form  of  "bank-notes."  July  I,  1904,  the 
Treasury  reported  that  there  were  $449,000,000  of  bank-notes  in  the 
hands  of  the  banks  or  in  circulation.  These  issues  alone  were  more 
than  ample  to  meet  all  fluctuation  money  demands  of  the  country. 
The  only  trouble  is  (as  in  the  case  of  a  permanent  policy  of  deposit- 
ing government  surplus  with  the  banks)  that,  when  the  banks  are  in 
trouble,  notes  are  not  available.  Like  the  government  deposits, 
they  have  already  been  absorbed  in  current  circulation,  have  all  been 
used  to  support  the  ordinary  banking  operations  during  periods 
of  low  money  demand,  and  in  time  of  strain  the  banks  have  their 
best  securities  tied  up  for  funds  with  which  to  do  business  when 
there  is  no  strain  to  be  met.  In  time  of  extraordinary  demand 
they  are  left  helpless. 

Why  should  this  be  so?  Why  might  not  these  notes  be  used 
in  such  a  way  as  to  permit  an  increase  of  at  least  $.|oo,ooo,ooo  in 
money  circulation,  and  a  simultaneous  increase  of  at  least  $t,6oo.- 
000,000  of  bank  credit  accounts  at  any  time  that  an  extraordinary  de- 


394 


PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 


mand  might  be  made  for  funds?  Many  bankers  have  suggested, 
as  a  way  out  of  the  difficulty,  that  a  tax  be  placed  on  issues. 
Secretary  Shaw,  in  his  Chicago  address  of  a  year  ago,  pointed  to 
this.  Require  the  banks  to  pay  a  tax  equal  to  the  commercial  rate 
of  interest  (let  us  say  5  or  6  per  cent.)  on  all  issues  over  and  above 
a  determined  minimum — or  call  it  interest  on  the  "issue  loan"  of 
the  government  to  the  banks — and  the  banks  would  not  encumber 
their  assets  except  when  money  demands  were  above  that  rate. 
These  suggestions  were  made  with  much  force.  The  result  may 
also  be  predicated  from  experience.  As  the  trustee  of  collaterals, 
and  as  the  department  of  issue  and  control  of  the  bank-note,  the 
Treasury  might  thus  lend  as  much  support  for  the  expansion  of 
money  circulation  and  current  credit  accommodation  as  the  system 
itself  would  require  without  relying  at  all  on  its  own  surplus  rev- 
enues or  credit  money  reserves. 

Aside  from  making  the  bank-note  circulation  in  large  part  an 
emergency  currency,  aside  from  giving  elasticity  to  our  national 
money  and  credit  system,  the  effect  of  such  a  law  would  be  two- 
fold. By  taking  a  large  part  of  the  present  issue  of  bank-notes 
out  of  circulation,  except  when  an  extraordinary  demand  arose,  the 
ordinary  demand  must  be  supplied,  and  the  amount  taken  out  of 
circulation  must  come  from  some  other  source.  This  would  neces- 
sitate an  increase  in  gold  certificates  or  other  forms  of  money  issue. 
The  ordinary  money  requirement  would  be  met,  but  it  would  not 
be  met  by  bank-notes.  The  necessary  money  funds  would  come 
either  from  an  increase  in  issues  of  government  or  by  importation. 
The  second  result  that  would  obtain  has  a  bearing  on  the  financial 
strength  of  the  banks  themselves.  If  the  banks  were  not  en- 
couraged to  encumber  their  best  resources  in  time  of  low  money 
demand;  if,  it  may  be  said,  they  are  required  to  retain  their  capital 
in  such  form  as  to  make  it  available  for  support  of  their  credit,  and 
were  permitted  to  deposit  "gilt-edged"  securities  of  such  kind  and 
quality  as  might  be  prescribed  by  the  Treasurer  for  bank-notes  in 
time  of  strain,  the  support  which  is  now  given  to  the  credit  of 
government  in  the  form  of  increased  strength  to  the  bond  market 
would  then  be  given  to  the  banking  business.  In  other  words, 
the  net  result  would  be  an  increase  of  banking  capital  for  banking 


BANKING  REFORM  AND  CURRENCY  SECTION 


395 


purposes — a  result  which  in  itself  would  be  desirable  as  a  means 
of  supporting  greater  elasticity  in  credit  accommodation. 

Another  conservative  principle  is  contained  in  the  American 
system  that  is  not  afforded  by  that  of  any  other  country.  As  the 
one  institution  permitted  to  issue  credit  money,  the  Treasury  gives 
to  the  people  a  form  of  currency  more  convenient  in  use  than  gold 
and  less  expensive  to  itself.  The  silver  dollar,  the  greenback,  the 
silver  certificate,  etc.,  cost  the  people  who  use  them  just  as  much  as 
gold  coin  or  certificates,  but  the  cost  of  these  credit  moneys  to  the 
government  is  less.  By  means  of  their  issue  the  government  is 
able  to  carry  on  its  own  business  and  to  decrease  its  interest-bearing 
debt  about  $600,000,000.  What  the  Treasury  stands  pledged  to 
do,  and  what  it  is  necessary  for  it  to  do  under  our  system,  is  to 
protect  these  credit  issues — i.  e.,  to  make  payment  in  gold  when 
gold  is  demanded.  So  long  as  no  doubt  arises  as  to  this,  there  can 
be  no  financial  disturbance  on  that  account.  But  there  may  be  a 
distinct  advantage  to  the  money  and  credit  system.  If  at  any  time 
our  foreign  balances  demanding  settlement  become  so  great  as  to 
cause  a  drain  en  bankers'  gold  reserves,  it  may  become  necessary 
to  stay  the  tide  of  exportation  as  a  means  of  protecting  the  credit 
system.  This  result  will  be  effected  through  the  demands  made 
by  the  banks  on  the  United  States  Treasury  for  payment  of  govern- 
ment credit  issues.  At  such  time  the  government  will  be  brought 
into  the  gold  market  as  a  means  of  meeting  its  own  demand  debt, 
and  gold  may  be  had  for  the  support  of  credit  of  the  country  at  a 
rate  more  favorable  than  it  could  be  had  by  any  individual  or 
private  banking  corporation. 

Xo  greater  fallacy  was  ever  put  forth  than  that  which  concludes 
that  a  government  which  is  not  in  the  banking  or  loan  business  can 
supply  money  capital  for  private  business.  If  all  the  gold  coin  of  the 
world  were  stamped  and  issued  from  the  United  States  Mint,  so 
long  as  the  business  habits  of  our  people  remained  the  same,  no 
greater  amount  of  gold  would  find  its  way  into  American  channels 
of  trade.  On  the  other  hand,  if  the  government  did  not  issue  or 
coin  a  dollar,  the  people  would  have  the  same  amount  of  money 
which  they  now  have  with  which  to  do  business.  Our  circulation 
would  not  increase  or  decrease  in  either  case.  Instead  of  buying 
gold  and  taking  it  to  the  mint,  we  might  buy  foreign  coins ;   instead 


3<)6  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

of  retaining-  the  currency  issued  by  the  government  or  that  put  out 
in  payment  of  its  own  obligations,  we  might  have  some  other  form  of 
currency.     But  the   usual  amount  of  currency  would  be  supplied 
from  one  source  or  another  by  coinage,  by  issue  or  by  importation, 
in    exchange    for   products   of   our    mines,   our   manufactures,    etc. 
What  the  government  can  do  and  does  do  is  to  make  the  funds  or- 
dinarily needed  conform  to  a  standard  adopted  for  our  own  use, 
and  to  protect  these  in  their  financial  and  physical  integrity  against 
impairment.     More  than  this,  the  government  may  provide  a  means 
by  which  extraordinary  demands  for  money  may  be  met  without 
resort   to   importation.     It  may   make   provision   for  meeting  this 
fluctuating  demand ;   it  may  make  this  extraordinary  money  supply 
more  readily  obtainable  than  might  be  if  our  traders  and  manu- 
facturers were  required  to  go   abroad   for  it.     This  may  be  done 
either  by  direct  loans  of  money  to  the  banks   from  the  Treasury 
reserves,  or  by  temporary  credit  money  issues  to  the  banks.     Instead 
of  the  banks  pledging  securities  abroad,  the  way  should  be  opened 
to  pledge  them  with  the  Treasury  and  thereby  obtain  any  amount 
of  money  for  such  extraordinary  circulation  that  is  needed  without 
disturbing  domestic  and   foreign  trade.     And  for  this  purpose  no 
system  is  so  well  adapted  as  the  American  system,  having  for  its 
main   supports  the   two   independent   financial    institutions — the  in- 
dependent commercial  bank  and  the  independent  Treasury,  the  one 
representing  the  financial  resources  of  fifteen  thousand  independent 
banking   constituencies,   the   other   representing  the   combined   re- 
sources of  the  nation. 


CURRENCY  REFORM 

ADDRESS  DELTVERED  BY  LESLIE   M.   SHAW,  SECRETARY  OF  THE  TREASURY,  BEFORE  THE 
OHIO   BANKERS'    ASSOCIATION,    AT    CLEVELAND,    SEPTEMBER    28,     I9O5. 

The  fact,  and  I  think  it  is  a  fact,  that  the  United  States  has  the 
best  currency  system  in  the  world,  docs  not  imply  that  the  currency 
system  of  the  United  States  is  perfect  or  that  it  cannot  be  improved. 
It  is  as  safe  as  any  system  in  the  world  because  it  is  established 
on  the  only  safe  basis  known  to  man— the  gold  standard.     It  is  not 


BANKING  REFORM  AND  CURRENCY  SECTION  397 

safe  simply  because  the  dollar  contains  100  cents.  If  we  were  on  a 
silver  basis,  the  dollar  would  still  contain  100  cents,  but  they  would 
be  silver  cents.  The  United  States  dollar  is  worth  not  only  100 
cents,  but  100  gold  cents.  The  dollar  is  worth  25.8  grains  of  gold. 
That  measures  the  market  value  of  our  dollar.  Whatever  25.8 
grains  of  gold  will  buy  our  dollar  will  buy,  and  it  is  worth  precisely 
the  same  uncoined  as  coined,  for  the  government  stands  ready  to 
coin  it  free  and  in  unlimited  quantities. 

Then,  in  addition,  every  dollar  of  our  currency — gold  certifi- 
cates, silver,  silver  certificates,  United  States  notes,  treasury  notes, 
national-bank  notes,  subsidiary  silver,  nickel  and  copper  coins — is 
redeemable  in  or  exchangeable  for  gold  at  the  will  of  the  holder. 
This  fixes  the  stability  of  our  currency.  Its  value  does  not  and 
cannot  fluctuate.  I  grant  that  there  is  no  express  statute  for  the 
exchange  of  gold  for  silver  certificates  or  for  silver  itself.  Silver 
certificates  are,  of  course,  redeemable  in  silver.  Silver  certificates 
are  simply  warehouse  receipts  for  the  number  of  silver  dollars 
mentioned  in  the  receipt,  and  on  the  return  thereof  the  coin  can  be 
demanded.  But  the  law  expressly  provides  that  the  Secretary  of 
the  Treasury  shall  maintain  the  parity  of  all  forms  of  money 
coined  or  issued  by  the  government.  The  only  way  to  make  a  silver 
dollar,  the  metallic  value  of  which  is  but  50  cents,  worth  100  cents 
in  gold,  is  to  give  gold  in  exchange  for  the  silver  whensoever  and 
bv  whomsoever  demanded.  On  this  proposition  the  record  has 
been  made  so  that  subsequent  Secretaries  of  the  Treasury  for  all 
time,  whoever  they  may  be  and  whatsoever  party  they  may  repre- 
sent, will  find  it  necessary  to  overrule  the  decision  of  at  least  one 
predecessor  before  they  can  refuse  gold  in  exchange  for  silver;  and 
until  such  refusal  silver  will  remain  at  par.  There  being  but  one 
way  to  preserve  parity  in  time  of  pressure,  the  best  way  to  avoid 
a  time  of  pressure  is  to  make  public  the  government's  intention  to 
redeem  in  gold  at  all  times.  Thus  all  forms  of  lawful  money  are 
exchangeable  for  gold,  and  national-bank  notes  arc  redeemable  in 
lawful  money.  These  provisions  make  our  system  absolutely  safe, 
and  no  man  need  look  the  second  time  at  any  form  of  our  circulating 
medium  to  discover  its  actual  or  exchangeable  value. 

It  is  the  most  convenient  system  in  the  world,  because  it  is  con- 


398    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

structed  on  the  decimal  or  metric  system.  It  is  not  necessary  to 
carry  a  lightning  calculator  in  order  to  make  change. 

The  system  is  not  perfect  largely  because  it  is  non-elastic.  It 
fails  to  respond  in  volume  to  the  changing  needs  of  seasons  and  of 
localities.  Attention  has  been  called  to  this  many  times  and  by 
many  people.  That  there  will  be  no  further  currency  legislation 
until  we  shall  have  experienced  a  panic  occasioned  by  this  want  of 
elasticity,  I  am  convinced.  The  country  does  not  appreciate  the 
danger,  and  until  the  danger  is  fully  understood  no  remedy  will  be 
applied.  We  came  nearer  such  a  panic  September  30,  1902,  than 
most  people  appreciate.  The  fact  that  we  then  escaped  does  not 
raise  a  presumption  that  we  shall  always  escape.  A  glaring  defect 
at  a  vital  point  will  sometime,  soon  or  late,  assert  itself.  Mean- 
time a  remedy  should  be  discovered,  discussed,  and  as  far  as  possible 
agreed  upon,  so  that  it  may  be  promptly  applied  when  the  people 
are  ready  for  it. 

Let  me  define  this  defect  more  specifically.  Annually  we  have 
an  excess  of  money  during  the  spring  and  summer  months.  An- 
nually we  pass  through  a  period  of  anxiety  as  we  approach  the 
period  of  crop-moving,  for  annually  the  volume  of  money  is  rel- 
atively insufficient  to  meet  this  sudden  increase  of  business.  We 
do  not  need  and  must  not  have  inflation.  The  average  amount  of 
money  is,  in  my  judgment,  abundant.  The  difficulty  lies  in  the 
fact  that  the  volume  remains  stationary.  The  result  is  as  unsatis- 
factory as  it  would  be  for  railroads  to  run  the  same  number  of 
freight  trains  with  the  same  number  of  cars  on  the  same  schedule 
of  time  at  all  seasons  of  the  year — rumbling  along  empty  in  June 
and  overloaded  in  October.  If  such  a  policy  were  pursued  by 
railroads,  the  unnecessary  cars  would  naturally  invite  loads  of  straw 
and  chaff  and  worthless  plunder ;  and  when  the  time  came  to  use 
the  cars  in  legitimate  business,  much  disturbance  would  ensue  while 
they  were  being  unloaded  and  fitted  for  profitable  employment. 
Similar  conditions  occur  annually  in  our  currency  system.  Cheap 
money  during  summer  months,  like  cheap  cars,  invites  anything  and 
everything  except  legitimate  business;  and  when  the  money  is 
needed  in  the  fall,  like  the  cars,  it  is  occupied,  and  much  disturbance 
to  commerce  is  occasioned  by  the  unloading.  In  the  language  of 
the  street  this  unloading  is  called  liquidation. 


BANKING  REFORM  AND  CURRENCY  SECTION  399 

Let  me  use  another  illustration.  You  bankers  were  nearly  all 
reared  on  a  farm,  and  most  of  you  have  led  a  horse  behind  a  buggy. 
Those  of  you  who  have  performed  this  task  have  doubtless  noticed 
that  when  you  let  the  horse  out  the  full  length  of  the  halter,  be  that 
halter  long  or  short,  you  have  experienced  some  inconvenience 
whenever  you  passed  rapidly  over  rough  places,  and  you  have  some- 
times felt  the  knot  at  the  end  of  the  strap.  Thus  by  experience 
you  have  found  it  convenient  to  keep  some  slack  to  be  let  out  as 
occasion  requires.  We  employ  every  inch  of  our  financial  tether  all 
the  time,  and  some  fine  day  the  unexpected  will  cause  another  acute 
tension  and  we  shall  again  feel  the  knot.  Fortunate  indeed  we 
shall  be  if  it  does  not  slip  through  our  hand. 

Now,  what  shall  be  the  remedy?  Shall  it  be  asset  currency? 
In  the  popular  acceptation  of  that  term,  I  answer  "No!"  Asset 
currency,  as  commonly  understood,  would  mean  inflation,  and  that 
we  must  not  have.  Asset  currency,  as  commonly  understood,  would 
be  supported  only  by  the  solvency  of  the  bank  of  issue.  That 
must  not  be.  No  currency  must  be  issued  under  any  circumstances 
that  will  cause  the  holder  to  look  twice  at  it  to  discover  its  ex- 
changeability for  gold.  Shall  it  be  emergency  currency?  In  the 
popular  acceptation  of  that  term,  I  answer  "No !"  The  United 
States  originates  more  commerce  than  any  other  country  on  the 
map,  but  our  chief  commercial  city  is  not  the  world's  clearing-house. 
It  ought  to  be,  but  it  is  not.  One  reason  why  it  is  not  is  the  fact 
that  it  has  sometimes  resorted  to  clearing-house  certificates,  which  is 
a  plea  of  guilty  to  an  indictment  charging  bad  management  locally 
or  bad  legislation  nationally ;  and  the  financial  world  charges  both. 
Clearing-house  certificates  must  never  be  authorized  by  law.  Let 
those  who  love  our  country  and  those  who  conserve  her  credit  set 
their  faces  against  such  a  course  with  the  same  intensity  as  that 
with  which  they  resist  the  free  and  unlimited  coinage  of  silver. 
Clearing-house  certificates  debase  our  currency  with  the  consent 
of  those  who  are  supposed  to  be  the  best  financiers  in  the  nation. 
The  free  coinage  of  silver  would  debase  it  through  political  up- 
heaval. The  threat  of  both,  I  doubt  not,  contributes  to  that  distrust 
which  prevents  foreign  bankers  from  keeping  their  international 
balances  in  America.  Whatever  the  remedy  shall  be,  it  must  not 
advertise  our  calamity  or  our  extremity. 


4oo    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

Among  the  many  remedies  suggested,  none  appeal  to  me  as 
strongly  as  the  authorization  of  additional  national-bank  circula- 
tion. This  method  involves  the  right  of  national  banks  to  increase 
their  circulation  in  an  amount  perhaps  equal  to  50  per  cent,  of  their 
outstanding  volume  of  government-bond-secured  circulation,  on 
which  the  bank  should  pay  a  tax  of  5  or  6  per  cent,  during  the  time 
it  is  maintained,  and  the  government  in  consideration  of  this  tax, 
should  guarantee  its  redemption. 

I  indorsed  this  plan  not  long  ago  in  the  second  largest  city  of 
this  nation.  The  next  morning  one  of  the  daily  papers  had  inter- 
views from  several  bankers  to  the  effect  that  they  would  not  issue 
currency,  under  ordinary  circumstances,  if  taxed  at  5  per  cent.  This 
confirmed  my  belief  that  the  proposition  was  wise.  It  certainly 
would  not  result  in  inflation.  Though  the  right  to  issue  additional 
circulation  were  granted,  I  should  be  exceedingly  glad  if  it  were  not 
exercised  for  many  years.  It  would  demonstrate  that  we  had 
passed  over  no  very  rough  places. 

You  may  call  this,  if  you  please,  an  emergency  provision.  So 
it  is;  but  it  injects  into  our  circulation  no  new  form  of  money  as  an 
element  of  alarm.  By  eliminating  the  one  statement  on  the  present 
bank-note,  "This  note  is  secured  by  bonds  of  the  United  States," 
the  additional  currency  could  be  made  identical  with  that  based 
on  government  bonds.  The  Comptroller  of  the  Currency  and  the 
bank  issuing  the  currency  would  alone  know  of  its  existence.  It 
would  not  advertise  its  existence  or  our  extremity,  and  I  can 
scarcely  conceive  of  conditions  under  which  it  would  remain  out 
sixty  clays.  It  could  be  printed  and  kept  ready  for  issue  as  oc- 
casion might  require,  and  it  would  be  retired,  not  by  gathering  up 
each  individual  bill,  but  by  a  deposit  of  an  equal  volume  of  money 
with  any  sub-treasury.  Then  the  notes  as  they  came  in  would  be 
charged  against  this  deposit  until  it  was  exhausted,  after  which 
redemption  and  reissue  would  run  on  as  before. 


BANKING  REFORM  AND  CURRENCY  SECTION 


401 


CURRENCY  REFORM 

ADDRESS  DELIVERED  BY  JOHN  L.  HAMILTON,  EX-PRESIDENT  OF  THE  AMERICAN 
BANKERS'  ASSOCIATION,  BEFORE  THE  MICHIGAN  BANKERS'  ASSOCIATION  AT 
GRAND   RAPIDS,   JUNE,    1906. 

The  American  Bankers'  Association  has  a  federal  legislative  com- 
mittee which  has  taken  up  and  is  preparing  a  plan1  of  currency  re- 
form, which  we  believe  will  be  beneficial  to  every  banker  in  the  United 
States  and  in  fact  to  all  the  citizens  of  the  United  States.  That  com- 
mittee was  one  appointed  pursuant  to  a  resolution  adopted  at  the  last 
convention  at  Washington,  and  by  virtue  of  the  resolution  I  happen 
as  president  of  the  association  to  be  a  member  of  the  committee. 

The  plan  provided  is  this :  that  a  currency  commission  of  seven 
members  shall  be  appointed  by  the  President  of  the  United  States 
and  confirmed  by  the  Senate;  the  Comptroller  of  the  Currency  to 
be  a  member  of  that  commission  and  the  other  six  members  to  be 
appointed  upon  the  first  commission  as  follows :  two  for  four  years, 
two  for  eight  years,  and  two  for  twelve  years  thereafter ;  the  com- 
mission to  be  non-partisan,  selected  from  the  different  sections  of 
the  United  States.  The  object  in  fixing  the  length  of  service  is 
this,  that  an  incoming  President  would  have  the  naming  of  only 
two  members  of  the  commission,  thereby  having  four  members 
of  the  commission  that  would  hold  over.  Hence  if  by  any  accident 
a  man  who  was  not  desirable,  not  a  safe  financial  man,  should  be 
elected  President,  he  would  not  disturb  the  financial  conditions  of 
this  country.  In  the  minds  of  the  public  to-day  there  is  a  senti- 
ment that  all  financial  institutions  or  any  other  institution  of  great 
importance  should  be  under  more  direct  federal  control,  and  that  is 
another  reason  for  the  selection  of  this  commission. 

It  is  proposed  that  national  banks  be  permitted  to  increase  their 
circulation,  in  times  of  emergency  or  in  times  of  necessity,  to  an 
amount  equal  to  50  per  cent,  of  the  bond-secured  circulation  of  the 
national  banks  outstanding.  The  object  in  basing  it  upon  its  bond- 
secured  circulation  is  this:  it  was  the  original  intent  of  the  gov- 
ernment, when  the  National  Banking  Act  was  formed,  to  provide 
a  market  for  the  government's  securities ;  that  idea  still  prevails 
in  the  minds  of  the  public,  and  so  far  as  T  am  personally  concerned 
T  believe  it  is  the  proper  basis  on  which  to  base  our  circulation.     If 

'This   plan  was  presented   to  the  Association   at   its  annual   convention   in 
St.  Louis,  October,   1906. 
26 


402    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

you  base  this  emergency  circulation  upon  the  bond-secured  circula- 
tion, then  there  will  be  a  tendency  to  increase  the  circulation  of  the 
national  banks.  If  national  banks  are  permitted  to  issue  an  emer- 
gency currency  based  upon  their  capital  or  surplus,  then  there 
will  be  a  tendency  to  decrease  the  bond-secured  circulation  and  to 
depend  upon  the  emergency  circulation, — a  condition  which  you 
would  not  want. 

We  all  know  that  there  is  not  a  real  necessity  for  more  circula- 
tion to-day.  but  there  is  a  necessity  for  more  confidence;  it  is  the 
lack  of  confidence  and  the  fear  of  an  emergency  that  cause  the 
withdrawal  of  funds  and  the  hoarding  of  them  away  during  the  fall 
of  the  year,  the  crop-moving  period.  If  this  condition  did  not  ex- 
ist, if  this  feeling  of  uncertainty  did  not  exist,  then  there  would  not 
be  any  occasion  for  an  emergency  circulation.  However,  if  it  is 
known  to  the  people  of  this  country  that  an  emergency  circulation 
can  be  issued,  then  the  necessity  for  that  will  largely  be  eliminated, 
and  the  natural  increase  of  bond-secured  circulation  which  naturally 
would  be  taken  out,  will  in  a  measure  eliminate  the  necessity  for  an 
emergency  circulation. 

The  theory  has  been  advanced  by  Mr.  Fowler  and  by  several 
men  prominent  in  financial  circles,  that  an  emergency  circulation 
should  be  based  upon  the  rule  of  supply  and  demand.  Human 
nature  is  the  same  everywhere,  with  bankers  and  with  the  individual, 
and  if  a  banker  can  issue  at  will  an  emergency  circulation  or  a  credit 
currency — call  it  what  you  will — the  tendency  is  for  him  to  issue 
that  currency  and  keep  it  out  as  long  as  possible.  Under  the  plan 
that  we  propose,  if  a  bank  wishes  to  issue  an  emergency  circulation, 
it  must  apply  to  this  commission,  stating  the  necessity  for  it,  and  the 
commission  will  determine  whether  such  a  circulation  should  exist 
or  not  and  will  fix  the  time  for  which  the  circulation  shall  remain 
outstanding.  If  the  time  fixed  by  the  commission,  for  instance, 
is  three  or  four  months,  then  the  bank  shall  pay  a  tax  at  the  rate 
of  i  per  cent,  per  annum  for  this  emergency  circulation  for  the  time 
it  is  outstanding.  In  order  to  retire  this  circulation  it  is  proposed 
that  an  additional  tax  of  i  per  cent,  each  week  shall  be  charged 
for  every  week  after  the  time  fixed  for  the  redemption  has  expired. 

Here  comes  another  difficulty  that  may  appear  to  many  of  you, 
and  that  is  this,  that  if  the  First  National  of  Grand  Rapids  or  any 


BANKING  REFORM  AND  CURRENCY  SECTION 


403 


other  city  should  issue  an  emergency  circulation  and  the  time 
were  fixed  at  three  or  four  months  for  its  retirement,  a  rival  con- 
cern, a  state  bank  or  private  bank  or  savings  institution,  might 
hoard  up  the  bills  of  that  institution  until  the  time  fixed  for  redemp- 
tion had  expired  and  then  present  those  bills,  which  would  be  a 
detriment  to  the  bank  issuing  them.  It  is  proposed  by  this  com- 
mission that  these  bills  shall  be  issued  by  the  Treasury  Department 
at  Washington,  and  nothing  upon  the  bill  shall  indicate  the  name  of 
the  institution  issuing  it,  so  that  in  the  event  that  a  bill  or  a  number 
of  bills  of  an  institution  should  remain  outstanding  for  a  longer 
period  than  the  time  fixed  for  the  redemption,  the  bank  issuing  it 
will  not  be  discredited  by  the  bill's  being  out. 

It  is  proposed  that  this  currency  be  secured  by  the  placing  of 
the  ordinary  securities  of  the  bank  with  this  commission  or  with  the 
Comptroller's  department,  such  securities  to  be  passed  upon  by  the 
Comptroller's  department,  in  an  amount  10  per  cent,  in  excess  of 
the  amount  to  be  issued.  The  banking  institutions  of  the  United 
States  are  the  only  commercial  institutions  that  have  any  means  of 
expanding  their  credit ;  they  are  the  only  institutions  as  a  whole 
that  have  no  means  of  protecting  themselves  by  using  their  credit ; 
and  it  is  the  purpose  of  this  commission  to  give  to  the  banks  this  kind 
of  protection  by  the  depositing  of  their  securities  temporarily  and 
the  issuing  of  these  bills,  so  as  to  tide  them  over  any  emergency 
that  might  temporarily  arise.  It  is  the  purpose  of  this  committee 
that  these  bills  shall  be  retired  by  the  depositing  of  sufficient  funds 
either  with  the  sub-treasury  or  depositaries  designated  by  the  com- 
mission for  their  redemption. 

The  result  will  be  this :  that  this  emergency  circulation  when 
once  issued  will,  a  certain  per  cent,  of  it,  remain  out  for  a  consider- 
able length  of  time,  giving  an  additional  amount  of  money  in  cir- 
culation. These  bills  in  the  hands  of  the  public  will  be  absolutely 
secure,  for  the  reason  that  the  bank  either  has  deposited  the  se- 
curities to  protect  the  bill  or  has  deposited  the  actual  cash  for  their 
redemption  with  the  Treasury  department  of  the  United  Static  : 
and  in  the  mind-  of  the  public  that  naturally  will  be  one  of  the  best 
bills  in  circulation. 

Another  '>n  that  has  arisen  in  the  minds  of  some  is  that 

the  moment  such  a  bill  becomes  a  law  the  price  of  government  bonds 


404    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

will  go  sailing  up  so  high  that  there  will  he  no  possihility  of  the 
banks'  purchasing  them  and  using  them  for  a  means  of  increasing 
their  bond-secured  circulation.  This  feature  is  a  protection — the 
proposed  plan — for  the  reason  that  if  the  price  of  bonds  did  not 
go  up  you  would  have  an  abnormal  inflation  of  circulation,  which 
would  be  a  condition  of  affairs  that  you  would  not  want.  However, 
if  there  should  come  a  panic  upon  the  people  at  the  present  time, 
you  would  want  a  means,  under  our  present  circulation,  of  increas- 
ing the  emergency  circulation  250  millions  of  dollars  and  upwards, 
— a  sum  sufficient  to  meet  any  condition  that  might  arise. 

Going  further,  it  is  proposed  that  any  bank  may  make  applica- 
tion for  this  kind  of  circulation  at  any  time ;  or,  in  centers  where 
there  is  a  clearing  house,  or  in  commercial  centers  like  New  York, 
Detroit,  Chicago,  and  such  places,  that  where  a  majority  of  the 
national  banks  of  those  cities  make  application  to  the  commission 
for  this  kind  of  security  it  may  be  issued.  In  other  words,  you 
place  one  commercial  center  independent  of  any  other  commercial 
center  as  to  the  issuing  of  this  particular  class  of  circulation,  en- 
abling them  to  meet  conditions  that  may  arise  within  their  par- 
ticular community,  and  are  only  temporary. 

The  federal  legislative  committee  has  been  before  Congress  two 
or  three  times  during  the  last  session,  and  we  have  learned  there 
that  if  the  bankers  of  America  hope  to  secure  legislation  beneficial 
to  their  interests,  such  legislation  must  have  the  endorsement  of 
the  bankers'  association  of  America  or  we  cannot  hope  to  secure  it.1 

There  is  a  movement  in  some  sections  of  the  country  for  real 
estate  loans  as  a  part  of  the  assets  of  national  banks.  There  were 
two  or  three  bills  to  this  effect  introduced  at  the  last  session  of  Con- 
gress. And  it  is  the  purpose  of  our  committee  to  prepare  and  to 
submit  to  the  association  a  separate  measure  along  this  line,  leaving 
it  to  the  wisdom  of  the  convention  as  to  the  advisability  of  adopt- 
ing or  rejecting  such  a  measure. 

'At  the  time  this  plan  was  presented  to  the  American  Bankers'  Associa- 
tion in  St.  Louis,  the  objections  made  were  such  as  to  cause  much  dissatis- 
faction. The  result  being  that  this  committee  was  enlarged  by  adding 
several  new  members,  and  in  conjunction  with  the  New  York  Chamber  of 
Commerce  Committee,  met  in  Washington,  D.  C,  in  November.  The  con- 
clusions arrived  at  by  this  joint  commission  are  embodied  in  a  report 
published  in   The  Financier,   November   19,    1906. — Editor. 


BANKING  REFORM  AND  CURRENCY  SECTION  405 

There  has  also  been  suggested  the  advisability  of  giving  trust 
features  to  the  national  banks  similar  to  those  enjoyed  by  some  of 
the  trust  companies  of  the  United  States.  This  will  also  be  sub- 
mitted, and  the  bankers  will  have  an  opportunity  to  decide  whether 
or  not  they  care  to  adopt  such  measure. 

In  addition  it  is  expected  that  the  different  committees  will  have 
prepared  their  reports,  and  will  submit  the  different  bills  that  are 
now  being  prepared  and  are  to  be  submitted  to  Congress,  upon  the 
various  questions  of  interest  to  the  bankers  of  the  United  States. 


THE  MONETARY  SITUATION  AND  ITS  REMEDIES 

ADDRESS   DELIVERED   BY   HENRY  CLEWS,  OF    NEW   YORK,   BEFORE  THE   WEST  VIRGINIA 
BANKERS'    ASSOCIATION,    AT    ELKINS,    JUNE,    1906. 

How  far  the  Chamber  of  Commerce1  on  the  reform  of  the  cur- 
rency will  succeed  in  providing  remedies  for  the  monetary  situation 
remains  to  be  seen.  But  from  the  twenty-seven  questions  it  has 
sent  to  bankers  and  others,  it  is  apparent  that  it  contemplates  no 
fundamental  change  in  our  currency  system.  Inferentially,  it  will 
not  interfere  with  United  States  legal  tender  notes,  nor  with  United 
States  bonds,  as  a  basis  for  the  circulation  of  the  national  banks. 
Yet  both  bases  are  indefensible  on  sound  economic  principles. 
The  issue  of  greenbacks  was  merely  a  war  measure,  and  intended 
to  serve  only  a  temporary  purpose ;  instead  of  which  we  have  made 
it  permanent,  thus  keeping  the  government  in  the  banking  business 
with  its  war  currency  system. 

There  can  be  no  question  as  to  the  false  bottom  on  which  the 
national  bank  currency  rests;  for  paper,  that  is  paper  money,  should 
not  be  secured  by,  or  redeemed  in  paper,  even  when  that  paper  is 
as  indisputably  good  as  United  States  bonds.     All  our  paper  money 

'This  address  was  delivered  during  the  time  the  Chamber  of  Commerce 

mittee  was  working  on  its  rrpnrt  which  was  ma<le  public  October  4,  1006. 

The  report  was  published  in  part   in  the  American    Banker,  October  6,  1906. 


4o6    PRACTICAL  PROP.LKMS  1  \T   P.ANKING  AND  CURRENCY 

ought  to  be  based  on  readily  convertible  assets  and  redeemable 
in  gold.  Bonds,  even  United  States  bonds,  by  which  national  bank 
notes  are  now  secured,  are  only  evidences  of  debt,  and  the  time 
will  come  when  these  will  be  liquidated — the  sooner  the  better. 

The  committee  probably  thinks  that  the  existing  order  of  things, 
notwithstanding  its  fundamental  errors,  is  too  deeply  rooted  and 
strongly  fortified,  to  be  materially  changed  without  danger  that 
the  remedy  will  prove  worse  than  the  disease.  It  consequently 
favors  more  national  bank  currency  on  the  present  basis.  Branch 
banks  and  rediscounting  for  small  banks  by  large  banks  are  also 
favored.  The  committee's  questions  indicate,  however,  that  it  favors 
the  abolition  of  the  sub-treasury  system,  and  to  that  result  it  should 
resolutely  bend  its  energies.  At  present,  the  sub-treasuries  are 
practically  banks,  like  the  old  United  States  bank  at  Philadelphia, 
with  the  important  difference  against  them  that  all  the  money  they 
take  in  remains  locked  up  in  their  vaults  till  paid  out  on  treasury 
drafts.  The  evil  effect  on  the  money  market,  and  particularly  on 
Wall  street,  of  thus  withholding  money  from  circulation  in  periods 
of  stringency,  has  been  too  often  felt.  It  was  more  than  usually 
conspicuous  and  severe  during  the  late  tight  money  ordeal,  because 
the  treasury  receipts  very  largely  exceeded  its  disbursements.  This 
greatly  aggravated  the  scarcity  of  money  in  New  York  due  to  other 
causes,  and  the  result  in  Wall  street  was  that  the  rates  for  call  loans 
ranged  at  times  within  the  last  six  months,  with  rapid  and  eccen- 
tric fluctuations,  from  15  to  30  per  cent,  and  on  one  occasion  touched 
125  per  cent.  We  have  here  a  phenomenon  entirely  distinct  from 
ordinary  monetary  conditions. 

However  much  our  commanding  positions  may,  in  other  re- 
spects, fit  New  York  to  be  the  world's  financial  center,  it  cannot 
aspire  to  and  secure  that  position  of  power,  so  long  as  it  is  the  scene 
of  these  violent  fluctuations  in  the  rates  of  interest  for  call  loans 
on  the  stock  exchange.  Measures  should  therefore  be  taken,  not 
only  to  prevent  them,  but  to  make  their  recurrence  impossible;  and 
how  this  can  be  best  and  most  efficiently  accomplished  is  a  matter 
for  very  serious  consideration. 

That  it  can  be  accomplished  is  evident  from  the  entire  absence 
of  any  such  violent  rate  oscillations  in  the  money  markets  of  Europe. 
There,   the   rates   of  interest   fluctuate  slowly   within   a   reasonably 


BANKING  REFORM  AND  CURRENCY  SECTION  407 

narrow  range,  generally  between  3  and  5  per  cent.,  the  extremes 
being  I  or  2  above,  or  below,  these  figures.  Such  unreasonable 
eruptions  in  the  money  market  as  we  have  sometimes  seen  in  the 
loan  crowd  of  the  New  York  Stock  Exchange,  were  never  seen  and 
would  be  impossible  in  London,  Paris,  Berlin,  or  any  other  Euro- 
pean capital.  Why,  then,  should  they  ever  occur  or  be  possible 
here? 

In  response  to  questions  by  the  Chamber  of  Commerce  commit- 
tee, I  would  say  that,  as  the  sub-treasury  system  is  a  disturbing 
factor  in  the  money  market,  provision  should  be  made  by  Congress 
for  the  regular  deposit  in  national  banks  of  surplus  government 
money  above  its  regular  working  balance  of  fifty  millions,  the  banks 
to  pay  interest  at  2  per  cent,  per  annum  thereon. 

Bank  notes,  in  my  opinion,  are  a  form  of  bank  obligation  the 
same  in  principle  as  bank  deposits  payable  on  demand;  and  these 
notes,  as  the  most  convenient  form  of  credit,  should  be  released  as 
much  as  possible  from  restrictions  not  necessary  to  secure  their 
safety,  acceptability,  and  redemption  in  gold,  or  United  States  legal 
tender  notes,  for  so  long  as  the  latter  may  be  kept  outstanding. 

In  seeking  increased  flexibility  for  our  currency,  I  would  not 
suggest  anything  that  would  impair  the  value  of  United  States 
bonds  as  a  basis  of  circulation ;  but  it  deserves  consideration 
whether  new  currency  might  not  be  issued  by  moderately  increasing, 
above  the  par  of  the  bonds  but  not  above  their  average  market 
value,  the  amount  of  notes  to  be  secured  by  them.  Then,  too,  why 
should  not  national  banks  be  authorized  to  issue  a  fixed  proportion 
of  circulating  notes  upon  their  general  resources,  these  to  be  secured 
by  a  guaranty  fund  ?  To  induce  the  retirement  of  these  notes  when 
not  needed,  because  money  is  superabundant  at  low  rates,  this  asset 
circulation  could  be  made  liable  to  a  graduated  tax.  The  propor- 
tion of  notes  to  capital  that  should  be  allowed,  and  the  amount  of 
the  tax.  arc  matters  upon  which  bankers  differ,  but  I  favor  strict 
moderation  in  both.  This  asset  currency,  under  moderate  restric- 
tions, for  use  under  ordinary  conditions,  would  be  far  preferable 
to  any  emergency  circulation,  issued  under  a  high  tax.  although 
Secretary  Shaw  recommended  the  latter  in  his  report  for  1905. 

As  the  taxes  collected  upon  circulation  of  national  banks   from 
1864  to  the  end   of  June,    1905,  amounted  to  $90,220,997,  and  the 


4o8     PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

failed  banks,  during-  that  period,  had  outstanding  only  $17,295,748, 
of  notes,  and  the  dividends  paid  on  their  claims  averaged  77.95  per 
cent.,  it  follows,  at  the  same  rateable  proportion  of  loss,  that  the 
deficiency  on  account  of  their  notes  would  have  been  only  $3,813,- 
712,  or  22.05  Per  cent.  of  their  total  circulation.  So  in  the  light  of 
this  experience  I  see  no  great  risk  in  a  guaranty  fund,  consisting  of 
the  taxes  paid  upon  circulation,  nor  do  I  see  why  it  would  not  be 
sufficient  to  redeem  all  the  notes  of  failed  banks. 

I  would  make  the  asset  currency  a  first  lien  upon  the  assets  of 
the  issuing  banks,  and  allow  the  banks  to  redeem  their  notes  at  ap- 
pointed redemption  places  in  the  large  cities.  This  would  save 
the  trouble  and  delay  of  sending  them  to  Washington,  and  by  facili- 
tating redemptions  when  money  was  easy,  would  give  more  ebb 
and  flow  to  the  currency  and  tend  to  prevent  excessive  speculation 
in  times  when  there  is  a  glut  of  money.  Under  the  Canadian  bank- 
ing system,  there  are  several  central  redemption  cities  for  bank 
notes ;  but  I  would  not,  as  is  the  case  in  Canada,  limit  the  right  to 
issue  notes  to  banks  of  not  less  capital  than  $500,000.  There  is 
safety  in  numbers,  in  regard  to  banks  as  well  as  other  matters. 
Then,  too,  it  would  be  well  to  make  all  the  sub-treasuries  in  the 
country  useful  as  national  bank  note  redemption  points,  because 
this  would  contribute  to  the  elasticity  of  the  currency  in  the  same 
way  that  it  does  in  Canada,  and  doubtless  Congress  would  favor 
such  a  measure. 

The  proposition  to  establish  a  new  bank  in  Wall  street  with 
$50,000,000,  or  even  more,  capital,  or  to  increase  the  capital  of  an 
existing  bank  to  that  extent,  to  serve  the  purposes  of  stock  exchange 
borrowers,  and  regulate  rates  of  interest,  after  the  manner  of  the 
Bank  of  England,  is  deserving  of  no  consideration  whatever.  It 
would  merely  excite  and  provoke  the  jealousy  and  opposition  of 
other  banking  institutions,  and  create  a  sort  of  monopoly  with 
special  privileges,  without  securing  the  end  in  view.  A  bank  of 
banks  is  not  what  we  want,  nor  do  we  want  a  revival  of  the  old 
United  States  bank.  Such  a  bank  as  the  Bank  of  England,  or  the 
Bank  of  France,  could  not  be  created  here,  either  in  a  day  or  a 
generation,  for  those  time-honored  institutions  are  the  growth  of 
ages  They  are  very  much  older  than  any  of  the  other  banks  there ; 
and,  under  the  control  of  their  respective  governments,  they  have 


BANKING  REFORM  AND  CURRENCY  SECTION  409 

grown  up  with  their  countries  and  become  practically,  although 
not  by  ownership,  government  institutions.  Hence  their  prestige 
and  power,  and  the  impossibility  of  other  banks'  superseding  them. 

It  may,  however,  deserve  consideration  whether  the  New  York 
Clearing  House  might  not  exert  power  in  regulating  rates  of  in- 
terest similar  to  that  exercised  by  the  Bank  of  England,  provided 
the  banks  belonging  to  it  would  unite  to  give  it  that  power ;  and 
is  there  any  reason  why  they  should  not?  Even  without  any  formal 
or  concentrated  action  in  this  direction,  outside  of  the  Clearing 
House  committee,  it  could  appoint  a  committee  to  name  every  week, 
or  oftener  when  necessary,  as  the  Bank  of  England  does,  a  mini- 
mum rate  of  interest  on  call  loans  and  discounts.  It  could  also 
fix  a  maximum  rate  for  each.  This  need  not  be  compulsory;  but 
even  as  a  recommendation  only,  it  would  have  a  powerful  moral 
effect,  and  the  Wall  street  banks,  if  they  approved  of  the  innova- 
tion, would  conform  to  it.  The  Clearing  House  could,  indeed,  after 
the  formal  approval  of  this  regulation  by  its  members,  enforce  its 
observance  under  penalties,  if  deemed  necessary.  In  this  alone, 
in  my  opinion,  a  practical  remedy  would  be  found  for  the  high 
rate  evil  on  the  stock  exchange. 

But  at  the  same  time,  greater  elasticity  could  be  given  to  our 
national  bank  currency  if  Congress  would  amend  the  law  so  as  to 
permit  the  issue  of  currency  against  specified  bank  assets,  subject 
to  the  approval  of  the  Comptroller  of  the  Currency.  This  is  a 
feature  of  the  banking  system  of  other  countries,  which  has 
always  worked  very  well  and  to  the  satisfaction  of  all  interests ; 
and  what  our  currency  urgently  needs  is  greater   elasticity. 

Strictly  speaking,  according  to  economic  principles,  we  cannot 
expect  perfect  currency,  with  all  the  resiliency  and  elasticity  pos- 
sible in  a  currency,  so  long  as  bonds,  instead  of  gold,  are  used  as 
the  basis  of  our  bank  circulation.  Yet  for  security  the  bonds  are, 
under  present  conditions,  just  as  good  as  gold;  and  there  would 
be  more  elasticity  in  the  bank  circulation  based  upon  them  if  the 
restrict!' in-  imposed  upon  their  redemption  by  the  art  of  [882, 
which  are  now  unnecessary,  were  removed.  Indeed,  the  inability 
to  retire  bank  notes  promptly  is  one  of  the  worst  faults  of  our 
system,  and  Congr<  hould  repeal  the  re  frictions  without  delay. 
If  this  obstacle  in  the  way  of  resiliency  were  removed,  and  the  un- 


4io    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

limited  retirement  of  bank  notes  permitted,  we  may  rest  assured 
that  free  expansion,  when  demanded,  would  quickly  follow  curtail- 
ment, and  this  ebb  and  flow  of  the  currency  would  obviously  be 
an  elastic  movement. 

As  it  is,  there  is  a  great  waste  of  banking  power  in  our  treat- 
ment of  national  bank  notes  and  reserves.  We  have  $544,765,959 
of  national  bank  notes,  and  only  $337,130,321  of  United  States 
legal  tender  notes,  and,  setting  gold  aside,  the  redemption  of  the 
former  in  the  latter  is  obviously  absurd  and  inconsistent  with  sound 
finance  and  good  banking.  We  see  in  the  present  system,  this 
$544,765,959  of  banking  capital  absorbed  and  represented  by  non- 
reserve  currency.  The  capital  is  perfectly  safe,  but  it  is  locked 
out  of  any  other  use,  and  rendered  inefficient  for  any  other  purpose. 
This  calls  for  a  remedy.  The  percentage  of  reserve  to  loans  in  na- 
tional banks  has  decreased  from  more  than  20  per  cent,  in  1898, 
to  less  than  15  per  cent.  Hence  the  bank  reserves  require  to  be 
increased.  The  law  relating  to  the  redemption  of  national  bank 
notes  in  United  States  notes,  or  greenbacks,  was  passed  when  the 
greenbacks  very  largely  exceeded  the  bank  notes  in  amount ;  but 
the  reversal  of  these  conditions  reminds  us  that  the  tail  is  now 
wagging  the  dog.  This  alone  makes  it  clear  that  the  law  should 
be  amended. 

But  beyond  all  this,  we  should  open  our  money  market  more 
to  the  rest  of  the  world  by  establishing  a  new  factor,  which  would 
always  afford  prompt  relief  in  times  of  stringency,  by  giving  us 
cable  transfers  of  gold,  instead  of  gold  shipments,  and  of  itself  pre- 
vent abnormally  high  rates.  Through  this  medium  we  could  in- 
stantly draw  gold  from  Europe  whenever  it  is  wanted,  and  Europe 
could  do  the  same  from  us,  when  it  is  needed  there.  I  refer  to  the 
establishment  of  an  international  gold  transfer  system,  or  clearing 
house,  to  supersede  and  dispense  with  what  I  may  call  the  old- 
fashioned  gold  see-saw.  Gold  in  circulation  is  doing  good  work, 
but  gold  see-sawing  across  the  ocean  is  going  to  waste.  The  cus- 
tom of  shipping  gold  from  one  country  to  another,  in  response  to 
the  ups  and  downs  of  the  market  rates  for  foreign  exchange,  not 
only  reminds  me  of  forward-and-back  movement  in  a  quadrille,  but 
suggests  that,  as  the  precious  metal  is  rendered  practically  useless 
while  in  transit,  it  should  not  be  used  in  a  dance  of  that  kind  across 


BANKING  REFORM  AND  CURRENCY  SECTION  41 1 

the  ocean.  The  subject  may  not  seem  to  be  very  important,  but  it 
really  is  so,  for  "tall  oaks  from  little  acorns  grow" ;  and  it  is  sur- 
prising that  in  the  march  of  modern  improvement  this  method  of 
settling  international  balances  has  not  been  superseded  by  a  shorter, 
quicker,  and  cheaper  cut  to  transatlantic  adjustments.  Bankers 
in  both  hemispheres  are  absurdly  behind  this  progressive  and  elec- 
tric age,  in  transporting  gold  from  the  new  world  to  the  old,  and 
vice  versa,  to  adjust  balances  between  them,  whenever  the  rates 
of  exchange  show  a  profit  in  the  transaction.  That  they  could 
profitably  dispense  with  it  is  obvious,  as  they  could  easily  establish 
this  transfer  system,  this  international  clearing  house  for  gold,  at 
very  small  expense.  Thus  the  risk  and  loss  of  time  involved  in  the 
old-fashioned  method  would  be  eliminated,  while  the  new  arrange- 
ment, being  under  their  own  control,  would  beyond  peradventure 
serve  every  necessary  purpose  of  the  shippers,  besides  assuring 
perfect  safety. 

All  these  disadvantages  could  be  obviated  and  this  handicap 
upon  our  commerce  removed  by  a  mutual-interest  arrangement 
between  the  leading  banks  in  the  United  States  and  Europe,  to  de- 
posit a  sufficiently  large  amount  of  gold  on  each  side  of  the  Atlantic, 
and  issue  international  clearing  house  certificates  and  draw  bills  of 
exchange  against  the  deposits.  This  gold  would  be  counted  as  part 
of  their  reserve,  if  in  their  own  vaults;  or  the  Bank  of  England 
in  London,  and  the  United  States  sub-treasury  in  Wall  street,  could 
be  used  as  the  gold  depositories.  We  have  a  clearing  house  for 
bank  checks  in  each  of  the  large  cities,  and  one  also  for  the  transac- 
tions of  the  New  York  Stock  Exchange.  London,  too,  has  its 
brink  clearing  house.  Why,  then,  should  the  clearing  house  system 
not  be  extended  to  international  transfers  of  gold,  so  as  to  make 
them  possible  at  any  moment  by  cable-telegraph  instead  of  the  slow 
process  of  six  day's  transfers?  In  this  way  our  international 
dealings  would  be  quickened  and  extend  our  financial  and  com- 
mercial relations  become  more  intimate.  There  is  no  good  reason 
why  we  should  unnecessarily  treat  gold  as  we  do,  when  we  can  save 
time,  money,  and  risk  by  1  eeping  the  metal  where  it  is  and  issuing 
certificates  of  deposit  againsl  it.  the  use  and  transfer  of  which  would 
serve  as  well  Id  shipments. 

The  present  custom  becomes  a  ridiculous  chase  across  the  At- 


412  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

lantic,  when  we  see  the  same  gold  shipped  to  Europe,  then  shipped 
back  to  America  within  a  few  days  after  reaching  its  destination, 
without  being  unpacked,  because  sudden  intervening  changes  in  the 
rates  of  exchange  make  it  profitable  for  the  former  gold  export- 
ing country  to  import  the  metal.  Such  wasteful  shilly-shally  pro- 
cedure would  be  likely  to  excite  mirth  in  opera  bouffe;  but  bankers 
who  ship  gold  are  very  serious  about  it,  and  seem  to  be  without 
enough  perception  of  the  ludicrous  to  see  anything  funny  in  its 
coming  and  going,  although  they  feel  the  shoe  pinch  in  its  costli- 
ness in  both  time  and  money.  As  the  world's  gold  production 
increases,  the  urgent  need  of  this  over-sea  change  will  become  more 
and  more  conspicuous  and  its  adoption  will  accord  with  the  gener- 
ally progressive  spirit  and  methods  of  our  telegraphic  and  tele- 
phonic age. 

Had  such  an  international  gold  clearing  house  existed,  the  saga- 
cious but  unprecedented  action  of  the  Secretary  of  the  Treasury,  to 
relieve  the  money  market  by  making  deposits,  as  secured  loans,  in 
certain  banks,  to  encourage  and  cover  their  prospective  gold  im- 
portation from  Europe,  the  same  to  be  returned  on  the  arrival  of 
the  gold,  would  have  been  unnecessary.  While  this  expedient  has 
well  served  a  temporary  purpose,  it  is  not  to  be  relied  upon  as  a 
permanent  source  of  relief  during  monetary  stress,  and  it  involves 
a  stretch  of  authority  under  the  law  that  is  open  to  grave  objec- 
tion. But,  as  it  happened,  the  Secretary's  action,  which  was  taken 
just  before  the  San  Francisco  disaster  occurred,  proved  particu- 
larly fortunate,  and  probably  prevented  a  very  serious  aggravation 
of  the  stringency  in  the  money  market,  owing  to  the  heavy  remit- 
tances to  California.  It  was  a  piece  of  good  luck  that  seemed 
almost  providential,  and  the  end  justified  the  means.  But  it  should 
always  be  regarded  as  only  a  fortuitous  circumstance  and  a  tem- 
porary expedient,  not  as  a  permanent  source  of  relief ;  and  it  em- 
phasizes our  need  of  a  new  international  gold  transfer  system. 
Moreover,  the  benefit  Europe  would  derive  from  it  would  be  equal 
to  our  own. 

The  Secretary,  under  the  circumstances,  acted  wisely  in  also 
increasing  the  treasury  deposits  in  the  national  banks  while  the 
government's  receipts  were  largely  in  excess  of  its  disbursements, 
so  as  to  offset,  as  far  as  possible,  this  preponderance  of  receipts, 


BANKING  REFORM  AND  CURRENCY  SECTION 


413 


and  lessen  the  drain  of  money  into  the  sub-treasuries.  But  this 
method  of  relief  is,  too,  only  a  temporary  expedient,  to  remedy  the 
evils  of  the  sub-treasury  system.  While  the  sub-treasury  system 
lasts,  Congress  should  authorize  the  Secretary  to  deposit  customs, 
as  well  as  internal  revenue  receipts,  in  the  national  bank  deposi- 
tories, in  times  of  stringency,  when  the  government's  receipts  ex- 
ceed its  disbursements  and  it  has  more  than  a  sufficient  working 
balance.  The  government  should,  as  a  compensation  to  it,  require 
the  banks  to  pay  interest  at,  say,  2^2  or  3  per  cent,  per  annum  on 
such  deposits,  these  not  to  exceed  in  amount  25  per  cent,  of  their 
paid-up  and  unimpaired  capital,  and  to  be  returnable  on  demand, 
but  without  requiring  these  special  deposits  to  be  secured.  They 
should,  however,  be  made  a  first  lien  upon  the  assets  of  the  banks. 
If  the  changes  above  suggested  were  made,  I  am  sanguine  that 
they  would  prove  to  be  remedies  for  the  evils  and  disadvantages 
under  which  we  now  labor,  and  thus  increase  the  stability  of  our 
money  market,  and  improve  and  fortify  the  machinery  of  the  whole 
monetary  system,  while  giving  more  elasticity  to  the  currency. 


PENDING  FINANCIAL  LEGISLATION 

ADDRESS  DELIVERED  BY  CHARLES  N.  FOWLER,  CHAIRMAN  OF  THE  COMMITTEE  ON 
BANKING  AND  CURRENCY  IN  THE  HOUSE  OF  REPRESENTATIVES,  BEFORE  THE 
AMERICAN    BANKERS'  ASSOCIATION,  AT   ST.   LOUIS,   OCTOBER,    IOX>6. 

You  will  pardon  me  one  or  two  personal  experiences ;  since 
they  furnish  whatever  of  confidence  and  assurance  I  have  that  in 
the  end  the  wisest  thing  will  be  done,  even  though  it  may  come 
as  the  result  of  bitter  trials  and  frightful  losses. 

When  Representative  E.  J.  Hill  came  to  Washington  in  1894, 
we  were  both  appointed  to  the  Banking  and  Currency  Committee, 
and  he  was  at  once  my  most  assiduous  and  powerful  opponent. 
But  his  absolute  intellectual  honesty,  his  great  ability,  his  determina- 
tion to  know  the  truth,  made  him  a  thorough  and  reliable  student. 
Coming  from  the  Connecticut  State  Convention,  in  the  spring  of 
1896,  he  showed  me  a  resolution  passed  there  to  the  effect  that  the 


4i4  PRACTICAL  TRORLEMS  IN  BANKING  AND  CURRENCY 

Republicans  of  Connecticut   were  utterly   opposed  to   any  kind   of 
currency  except  Mich  as  was  secured  by  government  bonds. 

He  asked  me  what  I  thought  of  it. 

I  replied  that  it  only  marked  a  degree  of  ignorance,  not  of  in- 
telligence. 

Six  months  later,  he  told  me  that  he  was  ready  for  at  least  fifty 
per  cent,  of  credit  currency. 

I  replied  that  if  he  took  six  months  for  study  and  reflection  he 
would  be  ready  for  another  fifty  per  cent  of  credit  currency. 

Again,  Hon.  Lyman  J.  Gage  told  me  soon  after  he  came  to 
Washington  that  he  knew  absolutely  nothing  about  the  subject ; 
but  his  years  of  study  brought  him  to  the  same  conclusion. 

Only  a  few  days  ago,  while  sitting  at  luncheon  with  the  officers 
of  one  of  the  great  banks  of  New  York,  I  remarked  that  I  had 
never  known  a  man  who  had  made  a  study  of  credit  currency  with 
an  open  mind,  who  did  not  come  out  exactly  at  this  same  point. 
One  of  the  officers,  himself  a  great  student  and  an  acknowledged 
leading  financier,  replied,  "That  is  literally  true." 

Cleanliness  is  next  to  godliness ;  therefore,  let  us  fight  to  make 
our  money  as  clean  as  it  is  good.  And  let  me  say  right  here  that 
you  will  get  nothing  in  the  way  of  legislation  unless  you — I  mean 
you  men  who  are  sitting  before  me,  you  bankers,  as  bankers,  not 
merely  as  men — interest  yourselves  in  demanding  that  your  repre- 
sentatives vote  for  the  things  you  want.  Let  us  understand  this 
once  for  all ;  and,  as  we  proceed  to  discuss  the  pending  legislation 
and  agree  upon  certain  principles,  let  it  become  a  part  of  your  daily 
life,  a  duty  of  every  hour,  to  secure  their  adoption.  Otherwise, 
if  you  make  them  only  one  of  a  hundred  recollections,  it  were  as 
well  that  we  had  never  come  here. 

First,  then,  let  us  here  and  now  resolve  that  we  will  have  clean 
money ;  and  pledge  ourselves  to  one  another  that  we  will  not  stop 
until  we  have  secured  such  legislation  as  will  bring  this  end  about. 
Such  a  law  is  now  pending  before  the  Ranking  and  Currency  Com- 
mittee.    It  will  become  a  law,  if  you  demand  it  and  work  for  it. 

A  bill  has  been  favorably  reported  by  the  Banking  and  Currency 
Committee,  and  is  now  pending  before  the  House  of  Representa- 
tives, providing  for  the  issuance  of  $5  and  $10  gold  certificates,  as 
well  as   the  present   denominations.     The   purpose   of  this   bill   is 


BANKING  REFORM  AND  CURRENCY  SECTION  415 

twofold.  First,  it  would  enable  the  Secretary  of  the  Treasury  to 
supplant  a  portion  of  the  $300,000,000  of  five-dollar  silver  certifi- 
cates with  gold  certificates  of  the  same  denomination,  and  thus  make 
it  possible  to  increase  largely  the  one  and  two-dollar  silver  certifi- 
cates, which  are  so  much  needed  in  the  trade  of  the  country.  Of 
this  you  are  more  fully  aware  than  any  other  class.  Will  you 
pledge  yourselves  here  and  now  to  fight  for  this  change ;  or  go  on 
forever  as  at  present  with  the  demand  for  small  notes  constantly 
increasing  because  of  additional  population  and  doubling  trade, 
but  with  nothing  out  of  which  to  make  them? 

The  second  object  of  this  measure  is  to  broaden  the  basis  of 
the  standard  of  value,  increase  the  quantity  of  gold  in  the  country, 
and  make  it  possible  to  distribute  it  among  the  mass  of  people, 
thereby  generalizing  its  use,  as  well  as  strengthening  our  reserves. 
These  objects  justify  your  active  and  insistent  co-operation. 

From  the  establishment  of  the  first  sub-treasury,  sixty  years 
ago,  the  practice  of  hoarding  or  locking  up  money  has  been  a  dis- 
turbing factor  and  a  curse  to  business.  Now,  jumping  over  all 
the  past,  and  taking  up  the  situation  precisely  as  it  presents  itself 
to-day,  what  shall  we  do ;  go  on  as  before,  or  like  intelligent  men 
treat  this  Government's  business  just  as  you  would  treat  it  were  it 
your  own,  making  only  such  distinctions  as  a  due  regard  for  the 
people's  interests,  from  a  national  point  of  view,  demands? 

The  fiscal  operations  of  our  Government  are  such  that,  the  com- 
ing year,  we  may  have  a  surplus  of  fifty  or  possibly  seventy-five 
millions.  Indeed,  we  may  again  have  the  same  excess  of  revenue 
we  had  from  1888  to  1892,  when  we  lowered  our  bonded  debt  from 
$1,021,000,000  to  $585,000,000,  a  decrease  of  $435,000,000.  What 
shall  be  the  conduct  of  the  Treasury?  Should  it  not  be  such  as  in 
no  way  to  interfere  with  the  commercial   interests? 

Tf  we  should  repeat  this  record,  we  could  pay  off  $435,000,000 
of  our  debt,  and  leave  it  at  $490,000,000,  or  $25,000,000  less  than 
the  amount  now  deposited  to  secure  our  bank-notes,  which  aggregate 
$517,000,000.  If  our  excess  should  not  be  applied  to  the  reduction 
of  our  debt,  it  would  have  to  be  deposited  from  time  to  time  in  our 
national  banks,  and  the  banking  capital  of  the  country  would  be 
reduced  by  the  cost  of  the  bonds  required  to  secure  such  deposits. 
Our  banking  capital  is  now  depleted  more  than  Si  50.000,000  by  this 


4i6  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

ancient  and  inane  procedure;  and,  though  the  Government  has  con- 
trol of  this  money,  it  is  paying  two  per  cent,  upon  it;  for  the  in- 
terest paid  on  the  bonds  held  by  the  Government  goes  to  the  banks 
that  have  put  up  the  bonds  to  secure  the  deposits. 

The  available  cash  balance,  July  I,  1906,  was  $222,000,000.  In 
other  words,  at  the  very  season  of  the  year  when  there  was  a  con- 
stantly growing  need  of  money,  and  panic  prices  for  its  use, 
the  Government  has  been  engaged  in  withdrawing  it  from  the 
channels  of  trade  at  the  rate  of  $15,000,000  every  month,  or  $47,- 
000,000  for  the  months  of  July,  August,  and  September.  It  may 
be  asked  whether  the  Secretary  of  the  Treasury  has  not  redeposited 
the  money  so  withdrawn.  Yes ;  but  only  on  condition  that  the 
banks  would  purchase  and  put  up  specified  bonds  amounting  to 
more  than  $50,000,000;  so  that  the  banking  capital  of  the  country 
has  been  depleted  during  these  three  months  by  that  amount.  As 
a  result,  credits  have  been  displaced,  business  seriously  disturbed, 
and  no  good  whatever  has  come  to  counterbalance  the  loss  and 
havoc.  Why  should  not  the  Government  do  just  what  you  are 
doing:  deposit  its  money  with  national  banks  and  get  two  per  cent, 
on  its  daily  balances? 

On  September  4,  1906,  the  National  banks  had  on  deposit  with 
national  banks  over  $830,000,000,  or  seven  times  as  much  as  the 
Government  had ;  and  were  undoubtedly  getting  2  per  cent,  interest 
upon  it.  The  state  banks  and  bankers  had  on  deposit  with  the  na- 
tional banks  more  than  $381,000,000,  and  were  undoubtedly  getting 
2  per  cent,  interest  upon  it.  The  trust  companies  and  savings  banks 
had  on  deposit  with  the  national  banks  upwards  of  $346,000,000,  and 
were  undoubtedly  getting  their  2  per  cent,  interest.  In  other  words, 
the  banking  institutions  of  the  country  had  on  deposit  with  our  na- 
tional banks  more  than  $1,500,000,000,  or  more  than  ten  times  as 
much  as  the  Government  had  ;  and  yet  the  Government  by  its  practices 
would  have  us  believe  that  although  it  has  the  power  of  supervis- 
ing and  knowing  all  about  the  management  of  every  national  bank 
in  the  country,  it  cannot  safely  do  what  probably  every  banking 
institution  in  the  country  is  doing  without  any  special  information 
at  all. 

Let  the  Government  deposit  its  receipts  from  day  to  day  pre- 
cisely as  our  municipalities  and  great  business  interests  do.     If  it 


BANKING  REFORM  AND  CURRENCY  SECTION  417 

had  pursued  this  policy  from  1879  down  to  the  present  time,  and 
received,  as  it  had  the  right  to  do,  two  per  cent,  interest  upon  its 
balances,  it  would  have  received  $50,000,000  in  interest,  and  not 
have  lost  a  single  dollar. 

A  bill  has  been  favorably  reported  by  the  Banking  and  Currency 
Committee  and  is  now  pending  before  the  House  of  Representatives, 
providing  for  the  daily  current  deposit  of  all  public  moneys.  It 
will  depend  upon  your  active  co-operation  whether  the  Government 
shall  do  its  business  as  the  bankers  of  the  twentieth  century  do 
theirs,  or  whether  it  shall  continue  to  do  it  as  General  Jackson, 
inspired  by  passion,  in  his  supreme  ignorance  began  to  do  it  nearly 
a  century  ago. 

During  the  present  crop-moving  period,  there  will  be  taken 
from  the  vaults  of  the  country  approximately  $200,000,000  of 
United  States  notes,  gold  certificates,  silver  certificates,  and  other 
forms  of  lawful  or  reserve  money,  and  sent  into  those  parts  of  the 
country  where  checks  are  not  used  for  the  purposes  to  which  this 
will  be  put.  For  the  sake  of  being  definite  and  comprehending 
fully  the  effect  of  this  movement  of  reserve  money  from  the  banks 
to  the  country,  let  us  assume  that  when  the  movement  began  the 
banks  had  loans  outstanding  up  to  the  limit  provided  by  law. 
What  effect  would  this  movement  have  upon  the  credits  of  the 
country  ? 

The  Actuary  of  the  United  States  Treasury  prepared  for  me  a 
table  showing  that  the  credits  which  would  grow  out  of  deposits  of 
$100,000,  made  respectively  in  a  central  reserve  city  bank,  a  reserve 
city  bank,  and  in  a  country  bank,  would  reach  an  aggregate  of 
$1,906,000.  This  is,  the  credit  standing  upon  $300,000,  deposited 
as  stated,  would  be  six  and  one-third  times  that  amount ;  while  the 
total  credits  of  the  reserve  city  banks  would  be  exactly  $1,000,000, 
or  five  times  the  $200,000  deposited  with  them. 

It  will  be  reasonable,  therefore,  to  assume  that,  if  $200,000,000 
of  money  in  actual  use  as  reserves  is  taken  out  of  the  bank  vaults 
and  scattered  over  the  wheat,  cotton,  and  corn  districts  to  assist  in 
moving  the  crops,  credits  to  the  extent  of  at  least  five  times  $200,- 
000,000,  or  $1,000,000,000,  are  disturbed  and  displaced.  With  the 
Treasury  concurrently  withdrawing  $50,000,000,  or  more,  from  the 
channel-  of  trade,  and  our  credits  contracting  to  an  extent  approxi- 
^7 


4lS  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

mating  S 1 ,000,000,000,  does  anyone  wonder  that  money  runs  up  to 
125  per  cent,  when  the  straining  and  breaking  eontraction  is  on? 

Need  anyone  wonder,  when  the  flood  of  money  returns  to  the 
centers,  the  wheat,  the  cotton,  the  corn,  the  cattle  and  the  hogs, 
the  products  of  about  one-half  of  our  entire  population,  having  been 
marketed,  and  there  is  no  further  immediate  need  of  these  tools  of 
commerce  in  the  country  districts,  that  money,  so-called,  but  nothing 
but  credit  based  upon  these  reserves,  can  be  had  for  one  per  cent.? 
Need  anyone  wonder  that  speculation  runs  riot,  and  that  we  have 
an  abnormal  money  condition  all  the  year  around  ?  Now  too  much  ; 
now  too  little;  and  never  anything  like  a  natural  relation  between 
capital  and  business — all  this  because  we  do  not  recognize  one 
simple  truth  about  credit,  and  put  it  into  operation.  What  is  this 
simple  truth?  It  is  this:  that  there  is  not  the  slightest  difference 
in  essence  between  the  true  bank-note  and  a  bank  check. 

The  committee,  appointed  by  the  New  York  Chamber  of  Com- 
merce, composed  of  some  of  the  best  scholars  in  the  United  States, 
used  the  following  language  in  its  report,  just  published: 

"Between  a  bank-note  and  a  bank  check  there  is  no  essential 
difference.  The  depositor,  to  be  sure,  is  a  voluntary  creditor  of  a 
bank,  and  the  checks  written  by  him  do  not  circulate  widely  without 
endorsement,  whereas  a  bank-note  is  an  acceptable  substitute  for 
money  among  people  who  have  little  or  no  knowledge  of  the  issu- 
ing bank.  Nevertheless  both  the  check  and  the  note  are  representa- 
tives of  money,  and  both  must  be  redeemed  on  presentation.  They 
have,  however,  different  fields  of  usefulness.  The  home  of  the 
bank  check  is  the  town  and  the  city,  where  people  keep  their  funds 
in  banks.  The  bank-note,  on  the  other  hand,  belongs  in  the  country 
among  people  who  have  no  bank  accounts,  with  whom  it  is  quite 
as  effective  as  money  itself.  If  our  banks  were  permitted  during 
the  crop-moving  season  to  increase  their  issues  of  bank-notes  by 
from  $100,000,000  to  $200,000,000,  these  notes  would  go  into  the 
harvest  fields  and  do  the  work  which  now  absorbs  legal  tender 
money.  Since  the  banks  under  such  circumstances  would  not  be 
obliged  to  pay  out  lawful  money  from  their  reserves,  they  would 
be  under  no  compulsion  to  contract  their  loans  as  at  present." 

Hon.  Lyman  J.  Gage  recently  used  this  language : 

:<There  is  no  difference  in  principle  between  the  obligation  of 


BANKING  REFORM  AND  CURRENCY  SECTION  419 

:he  bank,  expressed  by  a  credit  on  its  books,  and  its  note  which 
nay  pass  from  hand  to  hand.  The  public  is  the  best  judge,  accord- 
ng  to  time,  place,  and  circumstances  of  what  will  best  serve  its 
leeds,  whether  bank-notes  or  credit  on  bank  books;  and  the  great- 
est freedom  of  choice,  consistent  with  safety,  should  be  .allowed. 
[n  France,  the  people  hold  claims  against  the  Bank  of  France  to 
1  total  of  $1,045,000,000.  Of  these  claims  $944,000,000  were 
evidenced  by  the  notes  of  the  bank  and  only  $145,000,000  by 
:redit  entries  (deposits).  In  Germany  the  Imperial  Bank  owes  the 
people  $330,000,000,  evidenced  by  notes  and  $125,000,000  in  so- 
zalled  deposits.  Quite  in  contrast  with  the  countries  named  stands 
Canada.  The  banks  in  Canada  owe  the  people  eight  or  nine-fold, 
)v  book  account,  what  they  owe  them  as  evidenced  by  circulation 
notes.  It  is  to  be  observed,  however,  that  in  all  these  countries 
;:he  relation  between  the  two  is  constantly  changing  according  to  the 
desire  and  convenience  of  the  people.  By  an  easy  process  'de- 
posits' are  converted  into  'circulating  notes'  and  'circulating  notes' 
.are  convertible  into  'deposits.'  They  are,  in  their  nature,  recipro- 
:al ;  the  conditions  that  surround  them  are  essentially  alike,  and  the 
relative  volume  of  each  is  governed,  not  by  the  will  of  the  banks, 
Dut  by  the  needs  and  convenience  of  the  people." 

How  can  we  apply  this  principle  to  our  own  conditions?  It  has 
peen  observed  that  during  the  crop-moving  period,  this  year,  from 
July  1st,  there  will  have  to  be  sent  into  our  great  agricultural  sec- 
tions $200,000,000  of  currency  or  money  for  the  purpose  of  moving 
the  crops.  Let  us  assume  that  this  amount  is  due  from  the  banks 
in  the  money  centers  to  the  banks  located  in  the  crop-growing  terri- 
tory ;  and  that  on  the  first  day  of  July  the  demands  for  this  amount 
were  met  in  the  denominations  asked  for  by  cashiers'  checks  drawn 
to  bearer.     "What  would  the  result  be? 

All  the  country  banks  would  be  paid  off  in  full ;  but  the  city 
banks  would  have  a  corresponding  liability  to  meet  in  the  form  of 
:ashiers'  checks  or  credit  bank  notes,  for  the  two  are  identical. 
What  has  actually  taken  place?  Bank  book  credits  have  been  con- 
verted into  bank-note  credits  to  the  extent  of  $200,000,000.  The 
bank  credits  of  the  country  have  not  been  increased  by  a  single 
dollar.  There  has  been  neither  expansion  nor  contraction.  It  has 
been  a  simple  transaction  in  bookkeeping;    and  yet  the  entire  crop- 


4;o    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

raising  and  stock-producing  regions  have  been  served  precisely  as 
they  would  have  been  or  are  being  served  to-day  by  the  withdrawal 
and  transmission  of  $200,000,000  of  reserve  money  requiring  a 
contraction  of  credit  approximating  one  thousand  million  dollars. 
I  challenge  any  man  in  this  audience  to  deny  these  statements  and 
controvert  these  conclusions. 

But  will  it  be  suggested  that  this  is  a  large  conversion  of  book 
credits  into  note  credits  at  one  time  ?     Let  us  see.     The  book  credit 
of  the   national  banks   alone    are   now   $4,000,000,000.     Therefore 
the  conversion  of  $200,000,000  of  book  credits  into  note  credits  | 
only  five  per  cent,  of  the  total.     Again,  since  the  aggregate  of  al. 
bank  deposits  in  corporate  and  private  institutions  is  now  $12,000,- 
000,000,  it  would  be  a  conversion  of  only  one  and  two-thirds  per; 
cent,  of  the  total  book  credits  into  note  credits.     But  the  fact  is 
that  whether  large  or  small  relatively,  it  is  wholly  immaterial,  as  th( 
transaction  does  not  change  the  total  bank  credits  to  the  extent  oJ 
a  single  cent.     This  state  of  facts  brings  me  to  this  declaration 
That  since  bank-notes  are  not  a  legal  reserve,  they  cannot  be  usee 
to  expand  credit,  nor  will  their  creation  result  in  the  expansion  o:; 
credit. 

What  we  want,  and  this  is  the  crux  of  the  whole  matter,  ii 
this :  Place  our  note  redemption  so  located  in  the  United  State; 
that  no  banker  will  be  out  of  the  use  of  his  money  for  more  thar 
twenty-four  hours ;  and  the  cost  of  transmission  paid  by  the  Gov- 
ernment. Then  bank-note  credits  will  be  sent  home  when  theii 
mission  is  filled  as  directly  and  swiftly  as  now  are  checks  anc 
drafts ;  for  the  bankers  will  want  the  proceeds  of  the  note  credit; 
precisely  as  they  want  the  proceeds  of  their  checks  and  drafts. 

But  will  someone  innocently  inquire:  "Will  these  same  not< 
credits  be  safe?" 

No  one  has  ever  lost  anything  by  holding  Canadian  bank-note; 
during  the  last  fifty  years.  You,  you  American  bankers,  are  just  aij 
clever  as  your  Canadian  brothers.  If  you  can't  work  out  something 
yourselves,  you  can  adopt  their  plan. 

The  Banking  and  Currency  Committee  has  favorably  reportec 
a  currency  bill  to  the  House  of  Representatives,  providing  for  ai 
issue  of  credit  bank  notes  equal  to  50  per  cent,  of  the  capital  of  th< 
national  banks;    and  the  method  of  guarantee  makes  such  an  issu< 


BANKING  REFORM  AND  CURRENCY  SECTION  421 

safe  beyond  peradventure.  Our  present  bank-notes  are  a  first  lien 
upon  the  assets  of  the  banks  issuing  them.  With  this  law  remain- 
ing in  force,  taking  the  entire  history  of  the  National  banking 
system  down  to  1901,  the  average  tax  upon  the  outstanding  note 
issue,  after  eliminating  all  the  Government  bonds  deposited  to 
secure  circulation  from  our  calculation,  would  have  been  eight  one- 
thousandths  of  one  per  cent,  per  annum  to  secure  the  payment  of 
the  notes.  In  other  words,  the  reserve  of  five  per  cent,  for  current 
redemption  and  the  proposed  guaranty  fund  of  six  per  cent,  would 
be  sufficient  to  last  one  thousand  three  hundred  and  seventy-five 
years,  and  the  annual  tax  of  two  per  cent,  would  be  sufficient  to  pay 
the  average  loss  of  eight  one-thousandths  of  one  per  cent,  for  two 
hundred  and  fifty  years.  Again,  assuming  that  the  notes  had  not 
been  a  first  lien  and  that  the  entire  note  issue  of  all  the  banks  failing 
during  that  same  period  had  been  paid  out  of  the  guaranty  fund, 
it  would  have  taken  twenty-two  one-hundredths  of  one  per  cent., 
or  about  one-fifth  of  one  per  cent,  per  annum  upon  the  outstanding 
notes.  In  other  words,  eleven  per  cent,  would  last  over  fifty  years. 
Two  per  cent.,  or  one  year's  tax,  would  last  ten  years. 

The  banks  should  pay  the  Government  the  same  for  these  note 
credits  that  they  are  usually  paying  on  large  balances,  viz.,  two  per 
cent,  per  annum.  They  should  also  pay  into  the  Treasury  the  same 
redemption  fund  of  five  per  cent,  that  is  now  required  for  the  re- 
demption of  our  bond-secured  circulation. 

The  first  banking  bill  I  introduced  ten  years  ago  had  a  graduated 
itax  in  it  for  regulative  purposes.  But  I  have  graduated  from  that 
graduated  tax,  which  I  should  now  regard  as  an  almost  fatal 
blunder.  For  the  amount  issued  would  be  so  small  that  the  in- 
tended purpose  would  be  completely  neutralized,  since  banks  never 
have  been  and  never  will  be  eleemosynary  institutions.  Therefore 
they  will  not  issue  notes  at  a  loss,  which  would  be  the  case  when 
:he  tax  passed  the  three  per  cent,  limit,  if  we  can  assume  that  our 
3rofit  upon  such  circulation  would  be  approximately  what  it  is  in 
Canada. 

Again,  banks  arc  not  going  to  subject  themselves  to  the  criti- 
nsm  of  their  competing  neighbors,  who  will  say  that  they  are  paying 
ive  and  even  six  per  cent,  for  money.  Furthermore,  in  the  long 
"un,  if  you  assume  for  the  sake  of  the  argument,  that  the  banks 


-  pr  m Tn ;al  problems  in  banking  and  currency 

will  issue  those  highly-taxed  notes,  you  have  only  saddled  this  bur- 
don  upon  commerce;  for  under  the  pretence  of  these  heavy  taxes, 
you  hankers  will  find  a  way  not  only  to  get  the  tax  back,  but  more 
with  it.  I  assert  that  a  graduated  tax  is  indefensible  from  any  point 
of  view,  and  that  it  will  completely  defeat  its  declared  purpose. 

Perfect  facilities  for  redemption  and  freedom  from  cost  for  trans- 
portation will  place  note  credits  side  by  side  with  checks  and  drafts, 
and  effect  that  facile  interchange  and  transfer  from  one  to  the 
other  which  is  absolutely  essential  to  the  complete  and  perfect  ac- 
commodation of  our  currency  to  the  ever  varying  needs  of  trade. 

So  you  want  clean  money?  Join  us,  and  fight  for  it.  Do  you 
want  more  one  and  two  dollar  bills,  and  a  broader  and  better 
diffusion  of  the  gold  standard?  Tell  your  Congressman  that  we 
must  substitute  five  and  ten  dollar  gold  certificates  for  some  of  the 
$300,000,000  of  five  dollar  silver  certificates.  Do  you  want  the 
Government  to  continue  to  withdraw  ten  or  twelve  million  of  your 
reserves  each  month,  and  so  contract  our  commercial  credits  from 
$50,000,000  to  $60,000,000  at  the  same  time?  If  not,  then  demand 
that  all  public  moneys  shall  be  deposited  from  day  to  day  in  the 
usual  way.  Do  you  want  to  prevent  one  per  cent,  and  one  hundred 
per  cent,  money;  riotous  speculation  half  the  time,  and  ruinous  rates 
and  panic  stringency  the  other  half?  Adopt  without  delay  the 
principle  of  converting  bank  book  credits  into  bank  note  credits 
at  the  will  of  the  depositor,  in  accordance  with  the  demands  of  trade 
and  commerce. 


REFORM   OF  THE   CURRENCY   SYSTEM 

ADDRESS  DELIVERED  BY  JAMES  H.  ECKELS,  PRESIDENT  OF  THE  COMMERCIAL  NA- 
TIONAL BANK  OF  CHICAGO  AND  EX-COMPTROLLER  OF  THE  CURRENCY,  BEFORE 
THE    NEBRASKA    BANKERS'   ASSOCIATION,    AT   OMAHA,    NOVEMBER,    IO06. 

I  accepted  the  invitation  to  address  the  bankers  of  Nebraska 
upon  this  occasion  because  it  seemed  to  me  that  both  time  and  place 
were  opportune  for  a  discussion  of  the  question  of  a  reform  of  the 


BANKING  REFORM  AND  CURRENCY  SECTION  423 

currency  system  under  which  we  are  attempting  to  carry  on  the  vast 
business  transactions  of  our  business  world.  I  think  I  am  quite 
within  the  bounds  of  truth  when  I  say  that  nowhere  exist  serious 
differences  as  to  the  economic  wisdom  and  soundness  of  maintain- 
ing as  the  fundamental  basis  for  our  monetary  and  currency  issues 
the  gold  standard  of  value.  It  is  immaterial  so  far  as  the  present 
is  concerned  by  what  process  of  reasoning  those  who  opposed  such 
a  standard  have  brought  themselves  to  accept  it ;  the  important  fact 
is  that  it  is  accepted  and  the  error  of  the  doctrines  and  theories 
with  which  it  was  opposed  has  been  cast  aside  and  buried  in  the 
grave  with  the  hundreds  of  other  economic  heresies  which  have 
from  time  to  time  been  set  up  in  opposition  to  the  immutable  and 
unvarying  laws  of  trade  and  commerce.  The  elimination  of  this 
fruitful  source  of  bitter  discussion,  personal  recrimination,  and 
party  fury  has  carried  with  it  the  destroying  element  of  political 
bias  and  partisan  desire  from  all  that  which  affects  the  treatment 
of  monetary  and  banking  problems  in  the  United  States,  and  we 
can  approach  their  solution  upon  the  sounder  basis  of  merit,  historic 
accuracy,  scientific  truth,  and  economic  fact.  I  can  conceive  of  no 
happier  situation  in  which  to  consider  and  deal  with  a  question 
which  easily  ranks  with  those  of  the  very  first  importance  among 
all  with  which  our  governmental  authorities  have  to  do.  The  cur- 
rency question  ought  never  to  be  a  partisan  political  one,  and  now. 
least  of  all,  for  the  differences  between  contending  political  hosts 
in  the  arena  of  public  affairs  turn  on  other  things  which  appeal 
more  to  partisan   imagination  and  partisan  cupidity. 

I  am  not  unmindful  of  the  fact  that  the  attacks  on  what  are 
termed  the  evil  effects  of  so-called  trusts,  the  inequalities  of  taxa- 
tion, and  the  wrongful  follies  of  tariff  schedules,  together  with  the 
dreamy  and  charmingly  pictured  benefits  of  governmental  and 
municipal  control  and  ownership,  to-day  attract  the  attention  of  men 
in  public  place  and  more  than  fill  the  public  eye;  but,  taken  all  in  all. 
no  one  of  them  is  of  more  far-reaching  importance  or  affects  more 
greatl.  the  underlying  conditions  of  prosperity  in  the  country  than 
does  the  less  alluring  subject  of  currency  reform.  It  is  a  happy 
circumstance  that  the  need  of  a  more  responsive  character  of  bank- 
note issue  and  a  better  adapted  relation  of  government  finance  to 
daily  business  undertakings  demands  attention  at  a  time  when  the 


424  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

prosperity  of  the  country  in  undoubted,  its  agricultural,  manufac- 
turing, and  financial  activities  everywhere  apparent  and  substantial, 
and  its  credit  conditions  healthful  and  sound.  The  demand  for 
better  things  springs  neither  from  panic  nor  threatened  distress. 
It  is  not  the  far  cry  of  the  banker  in  the  first  instance,  but  of  the 
men  who  outside  the  distinctive  realm  of  finance  feel  how  inade- 
quate are  the  banks  of  the  country,  upon  wnom  the  business  in- 
terests of  the  country  rely,  to  meet  fully  and  cheaply  the  varying 
demands  of  trade  and  commerce.  The  man  who  has  something 
to  exchange  with  his  fellow,  whether  it  be  the  produce  of  the  farm 
or  the  product  of  the  factory,  whether  it  be  daily  labor,  or  work  of 
less  exhausting  character,  finds  when  he  studies  it  that  both  in  the 
first  and  in  the  last  analysis  his  interest  is  concerned  more  in  the  ex- 
tended usefulness  of  the  bank  than  in  any  other  institution  in  the 
community.  It  is  to  the  advantage  of  all  who  would  buy  money 
and  credit  that  they  be  obtainable  when  needed  at  no  greater  cost 
than  safety  and  prudence  make  necessary,  and  in  a  form  which  best 
answers  the  ends  to  be  accomplished.  We  are  apt  to  lose  sight  of 
the  fact  that  the  bank  was  the  outgrowth  of  the  necessities  of  the 
business  world  and  that  through  the  activities  of  this  "handmaid 
of  commerce"  the  innumerable  transactions  of  barter  and  trade  in 
every  portion  of  the  globe  have  been  made  not  only  possible,  but 
an  accomplished  fact.  I  sometimes  believe  the  very  number  of 
banking  institutions  and  the  close  relations  which  exist  between 
them  and  the  daily  movements  of  trade  have  caused  the  public  to 
look  upon  them  as  a  matter  of  course,  classing  their  field  of  en- 
deavor and  their  sphere  of  usefulness  with  that  of  every  other 
avenue  of  undertaking.  This  failure  to  differentiate  between  the 
pre-eminent  position  of  the  bank  as  the  potential  factor  in  the  up- 
building of  a  community,  by  intelligently  fostering  and  usefully  di- 
recting the  investment  of  credit,  which  a  bank  buys  and  sells,  and 
general  business  operations,  has  not  been  wholly  free  from  harmful 
effects.  It,  at  least,  has  not  infrequently  caused  both  the  people 
and  the  people's  representatives  in  legislative  and  executive  places 
to  be  wholly  indifferent  to  the  granting  of  such  extension  of  powers 
to  banks  as  would  enable  them  to  be  of  greater  service,  in  wider 
fields,  at  a  less  cost  to  the  public.  And,  after  all,  it  is  to  the  in- 
terest of  the  public  at  large  more  than  the  banker  in  particular  that 


BANKING  REFORM  AND  CURRENCY  SECTION  425 

banks  should  increase  in  strength,  become  far  reaching  in  influence, 
and  jnore  capable  of  granting,  on  safe  and  conservative  lines,  the 
credit  which  is  so  much  an  essential  necessity  in  the  maintenance 
of  the  complex  machinery  of  a  world-wide  as  well  as  a  local  ex- 
change of  the  things  which  are  to  be  sold  upon  the  one  hand  and 
bought  upon  the  other. 

The  usefulness  of  the  bank  finds  its  fruition  in  the  growth  and 
success  of  the  farmer  not  less  than  that  of  the  merchant,  the  manu- 
facturer not  less  than  that  of  the  corporation  which  controls  the 
country's  transportation  lines.  It  is  as  essential  to  labor  as  it  is  to 
capital,  and  through  its  instrumentality  adds  to  the  efficiency  of 
both.  I  am  certain  no  banker  fails  to  appreciate,  though  the  public 
too  often  seems  to,  that  the  bank  is  the  one  place  where  the  idle 
money  and  credit  of  every  locality  where  a  bank  exists  find  lodg- 
ment— not  for  idle  purposes,  but  that  they  may  become  active  forces 
in  the  daily  affairs  of  such  locality.  It  takes  the  dollar  of  the  single 
transaction  and  makes  it  bear  the  burden  of  many  transactions 
with  more  direct  benefit  to  those  who  buy  its  use  by  payment  of  in- 
terest thereon  than  to  the  bank  which  in  its  turn  borrowed  it  from 
the  depositor.  The  impossibility  of  there  being  sufficient  capital 
at  any  time  in  any  one  person's  possession,  or  in  any  place,  to  carry 
on  a  single  day's  exchanges  must  suggest  itself  to  the  person  who 
will  give  the  subject  even  the  most  casual  investigation.  The  manu- 
facturer must  needs  have  the  intervening  power  of  purchased 
money  and  credit  from  the  banker  to  make  possible  the  meeting 
of  a  multiplicity  of  expenditures  that  are  made  between  the  period 
of  the  obtaining  of  the  raw  material  and  the  manufacture,  sale  of, 
and  payment  for  the  finished  product ;  so,  too,  the  merchant,  between 
the  receipt  of  the  finished  product  and  the  distribution  of  it  to  the 
jobbing  or  individual  customer.  And  so  on  through  all  the  grada- 
tions of  the  world's  business  life,  the  control  and  utilization  of 
money  and  credit  through  the  organized  methods  of  the  modern 
bank  grow  more  and  more  important  to  every  person,  no  matter 
how  rich  or  how  poor,  and  take  a  commanding  position  in  the  affairs 
of  every  intelligent,  industrious,  and  prosperous  people.  The  na- 
tion which  is  unmindful  of  the  far-reaching  force  and  unconquer- 
able power  of  a  carefully  guarded,  efficiently  equipped,  and  fairly 
treated  banking   institution  cannot  but  at  the  critical  time   fall  be- 


6  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 


e 


hind  ami  ultimately  fail  in  every  contest  with  a  people  who  valu 
and  foster  them.     If  it  be  true  that  in  the  arbitrament  of  war  the 
/eminent    which    commands    money    and   credit    beats    down    its 
adversary,  it  is  not  less   true  that  upon  the  fields  of  peaceful  en-  i 
deavor  amid  the  forces  of  trade  and  commerce,  the  nation  of  great 
banks,   utilizing  every  refinement  of  credit,   will  gain   the  vantage 
ground  and  ultimately  triumph  in   all  that  goes  to  make  up  that  i 
prestige  which  springs  from  accumulated  wealth,  industrial  suprem- 
acy, and  financial  power. 

It  is  because  of  a  full  faith  and  an  unshaken  confidence  in  the 
truth  of  these  assertions,  coupled  with  the  thought  that  the  American 
people  have  been  almost  wholly  unmindful,  in  the  past,  of  how 
essentially  necessary  is  a  wise  consideration  of  legislation  which 
touches  upon  banks,  money,  and  credit,  that  I  am  here  to  urge  an 
awakening  of  the  nation's  legislative  body  to  the  vast  importance 
of  it  all  and  an  insistence  that  it  be  given  precedence  over  mere 
expenditure  of  public  funds,  the  creation  of  official  place,  or  the 
formulating  of  issues  for  future  political  campaigns.  The  im- 
portance of  legislative  action,  both  as  regards  the  note  issues  of  the 
nation's  banks  and  the  better  and  more  scientific  handling  of  the 
nation's  public  funds  on  the  part  of  the  Treasury  Department,  has 
been  emphasized  by  the  recent  action  of  the  country's  greatest  com- 
mercial body,  the  Chamber  of  Commerce  of  the  City  of  New  York, 
and  the  country's  most  important  banking  body,  the  American 
Bankers'  Association,  who  jointly,  through  representative  men  of 
high  character,  wide  experience,  extensive  research,  and  practical 
knowledge,  have  formulated  and  presented  a  plan,  enunciating  prin- 
ciples which,  if  crystallized  into  law,  it  is  believed  will  remedy 
existing  defects  in  our  treasury  and  currency  system  and  be  pro- 
ductive of  general  good.  I  accept  the  judgment  of  these  men  as 
sound  and  the  principles  enunciated  as  a  basis  of  legislative  enact- 
ment, as  being  as  nearly  correct  as  is  possible  under  conditions 
where  ideals  cannot  be  attained  and  perfection  cannot  be  had.  It 
is  possible  that  a  great  central  bank  might  better  accomplish  results 
more  satisfactory,  but  a  great  central  bank  is  an  impossibility  in 
this  country  where  political  issues  always  prevail  and  where  indi- 
viduality in  every  part  of  the  country  will  not  surrender  itself  to 
concentrated  power  in  the  field  of  banking,  no  matter  how  carefully 


BANKING  REFORM  AND  CURRENCY  SECTION  427 

such  power  is  dealt  with  or  how  perfect  and  beneficial  might  be 
the  result  of  its  use.  The  legislation  that  is  the  most  nearly  perfect 
and  improves  existing  conditions  and  remedies  present  defects 
must  commend  itself  as  a  practical  thing,  and  the  country  can  better 
afford  to  take  the  nearest  approach  to  the  best  thing  than  to  wait 
still  longer  years  for  legislation  without  defects  and  enactments 
that  are  beyond  question  in  every  word  and  line. 

The  commission  which  sat  at  Washington  under  .xiority  of 
the  Chamber  of  Commerce  and  the  American  Bankers'  Association 
proposes  legislation  which  will  emasculate  the  sub-treasury  system 
and  place  the  banking  business  of  the  Government  of  the  United 
States  upon  the  same  rational  and  common-sense  lines  as  is  that  of 
the  banking  transactions  of  the  man  of  everyday  affairs,  that  of 
every  state,  county,  and  municipality  in  the  country.  And  why 
not?  What  is  there  more  sacred  about  the  revenues  collected 
through  the  tax  levies  of  the  national  Government  than  those  of  the 
individual  states,  or  of  our  great  cities,  or  of  the  accumulated  funds 
of  private  capital?  Is  it  a  question  of  safety  of  funds  deposited 
with  banking  institutions  which  are  under  direct  supervision  and 
control  of  the  Federal  authorities.  If  it  is,  there  is  a  remedy  and 
the  government  can  readily  avail  itself  of  it.  The  government 
method  of  banking  its  receipts  of  revenues  is  the  irrational  method 
which,  if  followed  by  the  individual,  would  spread  disaster  every- 
where and  make  daily  business  impossible.  It  converts  the  dollar 
of  activity  into  the  dollar  of  idleness,  and  takes  out  of  the  channels 
of  trade  the  force  essential  to  a  continuance  of  the  flow  of  business 
undertakings.  As  long  as  the  nation  takes,  through  the  force  of 
law,  from  the  individual  citizen  more  than  the  government  needs 
for  legitimate  governmental  purposes,  it  ought  in  justice  to  him  at 
least  to  attempt  to  minimize  the  wrong  it  inflicts  by  permitting  the 
business  world,  of  which  he  is  a  part,  to  have  the  benefit  of  the 
daily  use  of  the  surplus  revenues  which  are  accumulated.  The 
wrong  is  doubly  inflicted  when  the  citizens'  capital  is  directly  les- 
sened on  the  one  hand,  and  indirectly  injured  on  the  other.  If  on 
revenues  deposited  in  the  banks  by  the  Secretary  of  the  Treasury 
interest  is  paid,  there  can  be  no  complaint  aboul  such  deposit  and  no 
charge  of  governmental  favoritism.  It,  too,  will  put  an  end  to  the 
continual   appeal  to  the   Secretary  1<»  aid    the  money  situation,   for 


428    PRACTICAL  PROBLEMS  IX  BANKING  AND  CURRENCY 

•  lay  by  day,  the  government  will  bank  as  others  bank  and  all  will 
know  what  the  conditions  arc  and  not  dwell  in  continuing  expec- 
tancy of  relief  being  granted  from  Washington.  It  is  unfair  both 
to  the  Secretary  of  the  Treasury,  no  matter  who  he  may  be,  and 
to  our  business  undertakings,  no  matter  what  they  are,  that  the  law 
should  necessarily  create  so  close  an  intimacy  between  the  two. 
Under  trying  circumstances  Secretary  Shaw  has  conducted  the  duties 
of  his  great  office  with  rare  skill  and  judgment,  but  it  would 
be  infinitely  better  to  make  the  appeals  in  every  trying  time  an  im- 
possibility, and  such  a  thing  can  only  come  about  by  either  the 
complete  abolishment  of  the  sub-treasury  system  or  the  rendering 
of  it  an  inconsequential  force  in  monetary  movements. 

I  wish  now  to  turn  to  a  discussion  of  that  which  constitutes 
the  more  important  provisions  which  this  commission,  on  behalf  of 
the  commercial  and  banking  interests  of  the  country,  will  ask  Con- 
gress to  enact  into  law — namely,  the  enlarging  of  the  note-issuing 
function  of  the  national  banks  by  granting  them  the  right,  under 
well  conceived  and  conservative  restrictions  which  assure  safety 
to  the  public  and  guard  the  banks  against  misuse  of  the  power 
given,  to  put  forth  promissory  notes  of  small  denominations  with- 
out a  specific  deposit  of  assets  to  secure  the  same.  I  am  aware 
that  there  are  many,  both  in  and  out  of  banking  circles,  who  either 
doubt  the  wisdom  of  such  note  issues  or  protest  against  them 
altogether.  They  take  counsel  of  their  fears  and  fortify  them- 
selves by  harking  back  to  periods  when  conditions  existed  which 
are  now  impossible. 

The  era  of  wildcat  money  has  gone  by  as  effectually  as  has  that 
of  the  irredeemable  greenback  fallacy  and  the  silver  heresy.  The 
world  of  business  has  moved  to  more  intelligent  periods,  better 
devised  monetary  and  currency  methods,  and  a  saner  understanding 
of  bank-note  values.  Tt  is  impossible  to  believe  that  in  more  than 
fifty  years  of  national  and  business  life  we  have  made  no  advance 
as  against  the  dangers  of  an  ill-adjusted,  badly  protected,  and 
speculative  currency  issue.  If  such  is  the  case  there  is  little  ground 
for  boasted  American  enterprise  and  keenness.  I  am  unwilling 
to  believe  that  such  is  the  case,  and  I  am  equally  loth  to  think  that 
from  the  conservative  councils  of  carefully  trained  men  of  affairs 
and  finance  should  come  any  plan  that  is  not  sound  in  principle 


BANKING  REFORM  AND  CURRENCY  SECTION  429 

and  safe  in  practice.  These  men  have  brought  to  their  years  of 
study  and  historic  research  equal  years  of  practical  and  technical 
experience  in  dealing  with  money  and  credits,  and  the  former  fits 
to  the  latter  and  the  latter  finds  proof  in  the  former,  and  I  set  over 
against  the  doubts  and  fears  of  the  timid  the  findings  of  these  men 
who  have  both  acted  and  studied. 

Xo  one  complains  of  the  absolute  goodness  of  the  present  bank- 
notes.    They  are  sound  beyond  peradventure,  but  they  bear  no  re- 
lation in  volume  or  activity  to  the  varying  wants  of  business  condi- 
tions.    They  are  measured  by  the  single  standard  of  the  price  of 
government  bonds  as  reflected  by  the  daily  quotations.     It  is  ab- 
surd to  contend  that  such  a  bank-note  issue  is  scientifically  correct 
or  can  possibly  adjust  itself  to  the  business  growth  of  an  expanding 
country.     We   can  better   afford  to  try  something   seemingly   new 
which   research   and   experience    proves   fundamentally    right,    than 
go  on  with  measures  which,  though  sound  in  a  single  regard,  are  in- 
adequate and  wrong  in  every  other  respect.     It  seems  to  me  that  we 
have  reached  a  point  in  dealing  with  currency  questions  wher^  we 
can  well  afford  to  try  and  reach  conclusions  through  an  intelligent 
analysis  of  the  facts  as  they  are,  and  not  as  we  either  think  they  are 
or  wish  they  were.    There  is  no  doubt  but  that  ultimately  the  knowl- 
edge  of   what   constitutes   the   underlying   principles   of  bank-note 
issues  will  control  and  we  shall  free  our  minds  of  many  misconcep- 
tions that  both  hamper  and  confuse  us.     I  am  sure  the  public  will 
at  no  distant  day  accept  as  axiomatic  the  fact  that  bank  notes  are 
nothing  but  mere  promissory  notes  issued  by  an  institution  and  of 
value  because  they  are  redeemable  upon  demand  in  that  which  has 
recognized  value.     They  are  no  more  money  than  a  bank  check  is 
money ;    they  are  only  a  promise  to  pay  money  and  are  redeemable 
in    money.     They   differ   only    from   checks  because  they   circulate 
as  money,  are  not  always  presented  so  quickly  for  redemption,  and 
are  of  smaller  amounts.     They  are  a  liability  of  the  bank  just  as  a 
book  entry  of  a  deposit  in  the  bank's  ledgers  is  a  liability,  or  as 
checks  are,  only   far  less  important  as  a  part   of  the  maintenance 
of  the  transaction  of  business.     They  are  good   or  bad  when   not 
specifically  secured  to  the  same  extent  as  bank  deposits,  and  bank 
checks  are  good   or  bad,  and   we  go  to   the  extremes  of  fear  and 
anxiety  when  we  worry  over  the  promissory  note  of  small  denom- 


tfo 


PRACTICAL  PRORLF..MS  IX  HANKING  AND  CURRENCY 


ination  and  accept  without  question  the  greater  indebtedness  of  the 
bank  as  it  finds  expression  in  the  book-entered  liability  and  the 
check-indicated  liability.  The  vast  usefulness  of  a  deposit  cur- 
rency and  a  check  currency  is  acknowledged  ;  why  not  supplement 
these  efficient  agencies  by  adding  a  responsive  bank-note  currency 
as  an  essential  element  to  meet  needs  which  neither  the  one  nor  the 
other  can  always  provide? 

But    the    argument    is    advanced    that   the    proposed    unsecured 
bank-note  suggested  by  this  commission  will  become  the  means  of 
an  inflation  of  our  volume  of  currency  which  will  encourage  specu- 
lation on  every  hand  and  work  out  panic  and  disaster.     I  challenge 
the  objection  thus  made  as  unsound  because  inflation  never  comes 
through  an  issue  of  notes  which  are  quickly  convertible  on  demand, 
with  redemption  agencies  near  at   hand,   and  where  the  monetary 
standard  of  value  upon  which  such  notes  rest  is  not  debased.     The 
inflation   of  the   currency   comes    from   a    debasing   of   a   country's 
monetary  standard  of  value,  and  never  from  the  issuance  of  con- 
voo^-'ble  bank-notes.     And  it  is  equally  true  that  speculation  bears 
no  relation  to  the  putting  out  of  convertible  bank-notes,  but  finds 
its  birth  and  growth  and  final  development  in  the  unwise  and  ab- 
normal extension  of  bank  credit,  as  that  credit  is   represented  by 
check    and    deposit    currency.     It    must    not    be    assumed    that,    if 
authority  is  given  to  the  banks  to  issue  such  notes,  thus  creating 
oth<:r  liabilities  for  those  issuing  them,  the  banker  is  going  to  become 
either  reckless   with   or  destructive  of  his   own   property.     He,   at 
least,  will  still  retain  some  sense  of  duty  toward  his  stockholders, 
and  be  possessed  of  some  degree  of  enlightened  selfishness  as  re- 
gards his   own  interest.     In  the  past  banks  which  have  been  suc- 
cessfully conducted  through  long  years  have  not  been  so  managed, 
because  they  have  only  put  forth  bank-notes  with  collateral  security 
deposited  with  the  government,  to  be  sold  for  their  redemption  in 
case  of  failure.     What  the  banker  has  found  as  a  correct  rule  of 
guidance  in  the  past  will  be  accounted  a  safe  rule  in  the  future,  and 
those  who  think  a  different  course  of  conduct  will  intervene  wholly 
underestimate  the  banking  intelligence  and  patriotism  of  the  coun- 
try.    The  banker   will   not   give  these   notes   marking   his    liability 
away   for   nothing.     He   will   sell   them   as   the   merchant    sells   his 
obligations,  and  he  will  issue  them  against  actual  existing  values, 


BANKING  REFORM  AND  CURRENCY  SECTION  431 

and  he  will  redeem  them  on  presentation  on  demand  at  the  place 
appointed  in  the  instrument  which  he  has  sold,  just  as  the  merchant 
does.  The  difference  will  lie  in  the  smaller  amount  alone,  and  no- 
wise in  principle.  Neither  will  the  banker  issue  more  notes  than 
he  can  redeem,  nor  will  the  public  accept  more  than  the  public  can 
use  and  pay  for,  and  the  fact  is  not  altered  by  whether  the  bank 
note  is  a  secured  or  an  unsecured  one.  I  do  not  overstate  when 
I  say  that  the  attempt  to  charge  a  convertible  bank-note  so  safe- 
guarded as  it  is  proposed  that  this  suggested  note  shall  be  either 
as  a  scheme  for  inflation  or  for  wild  speculation  is  wholly  without 
the  bounds  of  careful  thought  and  well-considered  reasoning. 

There  is  no  safeguard  which  conservatism  demands  that  has 
failed  of  provision  in  permitting  such  an  issue.  It  will  have  held 
against  it  a  reserve  of  the  same  character  and  as  adequate  as  the 
bank  deposit  liability.  For  its  redemption  there  are  to  be  agencies 
conveniently  located  so  that  there  will  be  no  delay  in  quickly  con- 
verting it  into  money.  It  will  be  issued  only  against  existing  values 
:  and  at  times  when  there  is  a  demand  for  its  use.  The  competition 
of  one  bank's  issues  against  another's  will  give  added  safety  to  the 
holder  of  it  and  warrants  the  assertion  that  redemption  will  be 
speedy  and  effective.  It  will  be  taxed  that  it  may  to  an  extent  be 
regulated,  and  it  will  have  as  an  added  assurance  to  those  who  hold 
it  the  immediate  redemption  of  it  by  the  government,  which  in  turn 
recoups  itself  from  a  tax-provided  safety  fund,  in  case  of  failure 
on  the  part  of  the  issuing  bank.  I  can  think  of  no  other  protective 
features  which  could  be  thrown  about  it  that  would  more  carefully 
regulate  its  issuance  or  insure  its  daily  and  in  case  of  failure  im- 
mediate redemption. 

I  have  but  a  single  other  suggestion  to  make,  and  I  am  done.  It 
is  upon  the  necessity  of  granting  this  more  adequate  power  of  note 
I  issues  to  the  banks.  To-day  there  is  no  adequate  means  in  this 
country,  outside  of  artificial  and  unnatural  ones,  of  meeting  the 
changing  needs  of  business  requirements.  The  granting  now  and 
then  of  government  deposits  means  nothing  under  existing  condi- 
tions. In  every  season  of  extraordinary  crop  movement  or  manu- 
facturing activity  the  banks  find  themselves  either  unable  to 
properly  provide  credit  to  those  who  de  erve  it,  or  if  they  do  so 
the  strain  is  so  gnat   a     to  cause  such  high  rates  of  interest  as  to 


432  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

lav  an  added  burden  upon  every  customer.     The  bank's  assets,  no 
matter  how  good,  are  dead  in  so  far  as  being  available  for  purposes) 
of  relief  of  a  situation  which  ought,  without  difficulty,  to  be  corrected.] 
They    cannot   discount    their   paper   without   causing  comment  and 
criticism,  and   they  cannot  encroach  upon  their  reserves.     The  re- 
sort to  a  bond  secured  note  is  expensive  and  far  from  speedy,  and  j 
so  in  more  than  one  instance  the  country  in  the  midst  of  unprece- 
dented prosperity  has  stood  in  the  shadow  of  disaster  because  of 
needed  banking  relief.     It  is  because  of  this  fact  that  there  is  the 
demand  that  the  banks,  the  properly  organized  agencies  for  caring 
for  the  needs  of  business,  be  granted  the  power  to  provide  a  credit 
currency  which  is  not  only  possessed  of  the  quality  of  safety,  but 
adds  to  it  the  no  less  important  quality  of  being  responsive  to  the 
requirements  of  our  highly  developed  and  complex  business  world. 

Such  a  bank-note  system  we   do   not  have,   and   until  we  are 
possessed  of   it  we  must  look  for  high  rates  of  interest  when  we< 
least  should  have  them,  and  recurring  periods  of  uncertainty  and 
doubt.     The   stopping  of  one  undertaking  here  and  another  there 
will  mark  our  business  and  financial  career.     It  cannot  be  otherwise. 

In  conclusion,  permit  me  to  quote  as  embodying  the  truth  of  the 
whole  matter  a  single  sentence  from  the  work  of  a  distinguished 
writer  on  political  economy  whose  authority  is  recognized  on  two 
continents :  "First  assure  the  permanence  of  the  standard,  then 
remove  all  shadow  of  doubt  as  to  the  immediate  convertibility  of  the 
media  of  exchange  into  that  standard,  and  the  expansion  and  con- 
traction of  the  media  of  exchange,  the  currency,  can  be  with  con- 
fidence left  to  take  care  of  itself."  I  cannot  believe  that  the  plan 
which  is  offered  for  legislative  sanction  fails  in  any  of  these  respects. 


BANKING   REFORM   AND   CURRENCY   SECTION 


433 


INFLUENCE  OF  THE  INCREASING  GOLD  SUPPLY  UPON 
PRICES  AND  THE  RATE  OF  INTEREST 

ADDRESS  DELIVERED  BY  JOSEPH  FRENCH  JOHNSON,  DEAN  OF  THE  NEW  YORK 
UNIVERSITY  SCHOOL  OF  COMMERCE  ACCOUNTS  AND  FINANCE,  BEFORE  THE 
PENNSYLVANIA     BANKERS'    ASSOCIATION,    AT     WILKESBARRE,    JUNE,     I9O5. 

Gold  is  the  most  interesting  of  all  the  metals.  Everybody  wants 
as  much  of  it  as  he  can  get,  and  all  men  are  concerned  in  its  scarcity 
and  its  abundance.  Any  change  in  its  value  in  one  way  or  another 
affects  the  welfare  of  every  man  and  woman  in  the  civilized  world. 
It  is  on  this  account  that  gold  is  called  a  precious  metal.  Gold  de- 
rives its  unique  position  among  metal  from  its  use  as  money.  It 
is  to-day  almost  a  universal  standard  of  prices  and  values.  Every- 
where men  measure  their  wealth  in  gold,  and  unconsciously  take 
it  for  granted  that  their  riches  are  increasing  in  proportion  as  their 
power  to  get  gold  increases.  Because  gold  is  used  as  the  standard 
of  prices  the  average  man  thinks  it  is  stable  in  value.  All  other 
things  may  rise  or  fall  in  value,  but  not  gold — that,  he  thinks,  is 
immovable. 

A  very  little  clear  thinking,  however,  soon  convinces  one  that 
with  respect  to  its  value  or  exchange  power  gold  is  no  exception 
among  the  metals.  Its  value  depends  upon  its  abundance  in  re- 
lation to  the  demand  for  it.  Any  great  increase  in  its  supply  must 
sooner  or  later  force  down  its  value.  The  reason  why  the  average 
man  fails  to  sec  this  truth  is  because  gold,  being  itself  the  standard 
of  prices,  has  no  price.  Men  think  of  an  ounce  of  gold  as  being 
always  worth  $20.67,  ^iat  being  the  amount  of  money  into  which 
it  is  coined  at  the  mint.  Now,  then,  can  it  be  true,  people  ask,  that 
gold  changes  in  value  when  you  can  always  sell  it  for  the  same 
amount  of  money?  When  the  prices  of  things  in  general  decline, 
people  think  it  is  because  their  values  are  falling.  If  prices  in 
general  are  rising  people  speak  of  a  rise  in  values.  The  truth  of  the 
matter,  namely,  that  these  changes  indicate  changes  in  the  value 
of  gold,  never  occurs  to  the  practical  man  of  affairs  unless  he  gives 
especial  thought  to  the  money  question. 

It  is  unnecessary  to  develop  any    fundamental  principles  with 

regard  to   the  nature  or   value  of  money.     We  have  before  us  a 

concrete  question  :    What  is  likely  to  be  the  effect  of  the  increasing 

pply  of   gold   upon   prices  and   the   rate  of  interest?     The    facts 

28 


434 


PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 


which  have  suggested  this  topic  are  doubtless  familiar  to  all  of 
you.  During  the  last  ten  years  the  output  of  the  world's  gold  mines 
has  been  increasing  at  an  unprecedented  rate.  In  1890  it  amounted 
to  $119,000,000;  in  1895,  to  $200,000,000;  by  1899  it  had  increased 
to  $307,000,000  per  annum,  and  in  1904,  according  to  the  estimate 
of  our  director  of  the  mint,  it  amounted  to  over  $350,000,000. 
When  we  consider  that  during  the  first  fifty  years  of  the  nineteenth 
century  the  total  output  of  both  gold  and  silver  was  less  than  two  bil- 
lion dollars,  while  the  output  of  gold  alone  in  that  period  was  only 
$800,000,000,  or  about  $16,000,000  per  annum,  whereas  in  the  last 
fourteen  years  the  output  of  gold  has  amounted  to  nearly  three  and 
one-half  billion  dollars,  it  is  not  surprising  that  very  grave  ques- 
tions arise  in  the  minds  of  thoughtful  men  with  regard  to  the  prob- 
able future  of  the  value  of  gold,  and  with  regard  to  the  effect  upon 
human  welfare  which  changes  in  the  amount  of  gold  will  exert. 
Can  the  world  absorb  $350,000,000  of  new  gold,  or  must  its  value 
fall  in  order  that  a  place  may  be  made  for  it  in  the  markets?  If 
its  value  does  fall,  we  know  that  prices  must  rise.  How  will  this 
rise  of  prices  be  brought  about?  Will  it  be  steady  and  gradual, 
or  will  it  be  sudden  and  spasmodic?  What  effect  will  it  have  on 
the  business  enterprises  of  men?  Will  it  lead  to  speculation  and 
panic?     Will  it  have  any  influence  on  the  rate  of  interest? 

In  order  to  bring  out  my  answers  to  these  questions  in  an  intel- 
ligible, if  not  logical,  order,  I  propose  to  consider  the  subject  from 
three  different  points  of  view.  First,  how  does  an  increasing  supply 
of  gold  tend  to  affect  prices  ?  Second,  does  it  have  any  relation  to 
the  rate  of  interest  and  the  money  market?  Third,  what  are  the 
conditions  which  govern  the  production  of  gold,  and  do  these  con- 
ditions now  warrant  an  expectation  of  a  continued  large  increase  of 
the   supply? 

In  order  to  avoid  confusion,  it  is  necessary  to  have  clear  ideas 
as  to  the  meaning  of  the  words  we  use.  Unfortunately  the  word 
money  is  often  employed  in  different  senses.  In  my  opinion,  in 
its  scientific  and  proper  use  it  means  the  standard  of  prices,  that 
valuable  thing  which  men  use  as  a  medium  of  exchange  or  means 
of  payment,  everyone  being  willing  to  accept  it  In  its  popular 
use,  however,  this  idea  is  confused  with  various  forms  of  credit. 
Most  people  think  of  the  greenback,  silver  dollar,  and  bank  note  as 


BANKING  REFORM  AND  CURRENCY  SECTION  435 

money.  These  things  are  not  money  in  any  proper  sense  of  the 
word.  They  are  all  promises  to  pay  money.  They  are  representa- 
tives of  money.  They  possess,  as  it  were,  the  power  of  attorney 
for  money,  and  so  are  able  in  the  business  world  to  do  almost  every- 
thing that  money  itself  can  do.  Again,  you  bankers  use  the  word 
in  a  peculiar  sense.  When  you  speak  of  money  as  being  scarce  or 
"tight"  you  do  not  mean  that  there  is  less  gold  or  currency  than 
before;  you  mean  merely  that  your  lending  power  is  exhausted; 
that  the  ratio  between  your  reserves  and  your  liabilities  is  near 
the  danger  point.  Money  when  used  in  this  sense  in  the  financial 
world  is  really  equivalent  to  loanable  funds  or  capital.  In  what  I 
have  to  say  I  shall  endeavor  to  use  the  word  money  in  what  I  have 
defined  as  the  scientific  sense.  To  cover  the  popular  usage  of  the 
term,  I  shall  use  the  word  currency,  which  may  properly  enough  in- 
clude all  generally  acceptable  media  of  exchange,  such  as  gold,  green- 
backs, silver  dollars,  bank  notes;  and  when  I  have  in  mind  what 
is  sometimes  called  bankers'  money  I  shall  speak  of  loanable  funds. 

In  discussing  the  probable  effects  of  the  new  gold  upon  prices, 
we  must  first  consider  the  part  which  credit  plays  in  the  making  of 
prices.  Some  writers  have  put  forth  the  view  that  credit  in  the 
modern  world  is  of  such  great  consequence  that  mere  changes  in 
the  volume  of  gold  cannot  produce  any  great  changes  in  the  prices 
of  goods.  In  my  opinion,  this  view  of  the  subject  is  a  mistaken  one. 
Credit  is  merely  an  auxiliary  of  gold.  It  increases  the  efficiency 
of  gold  just  as  rapid-fire  guns  increase  the  efficiency  of  the  battle- 
ship. The  more  extended  our  credit  system,  the  greater  the  number 
of  exchanges  that  can  be  mediated  by  an  ounce  of  gold.  A  dollar 
in  a  bank  will  do  five  times  as  much  buying  as  a  dollar  in  the  street. 
.Modern  credit,  instead  of  lessening  the  importance  of  each  ounce 
of  gold  in  the  world,  has  greatly  increased  it,  for  every  ounce  of 
-■Id  can  now  be  made  the  basis  for  credit  transactions  much  ex- 
ceeding in  volume  the  value  of  gold. 

I  do  not  mean  to  imply  that  the  present  general  use  of  credil 
as  a  medium  of  exchange  can  be  ignored,  or  that  it  does  not  com 
plicate  matters.  It  has  given  rise  to  an  important  new  demand  for 
gold  ;  namely,  to  serve  as  a  basis  for  credit,  or  as  a  banking  reserve. 
Banks  do  not  voluntarily  carry  more  gold,  or  reserve,  than  they 
deem  adequate  to  meet  their  demand  liabilities.     But  a  proportion 


436    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

of  reserves  to  liability  which  is  considered  adequate  at  one  time 
is  not  adequate  at  another.  The  basis  of  credit  is  confidence,  and 
when  confidence  is  lacking,  or  is  threatened,  the  banker  everywhere 
increases  the  hoard  of  his  reserve,  thus  preventing  gold  from  having 
any  effect  whatever  upon  prices.  But  when  the  situation  changes, 
and  hope  takes  the  place  of  distrust,  then  the  bankers'  reserve, 
through  the  agency  of  credit,  becomes  a  quick  and  powerful  stimulus 
to  prices.  We  need  not  expect,  therefore,  a  steady  and  gradual 
advance  of  prices  to  result  from  the  present  outpour  of  gold.  We 
may  expect  spasmodic  upheavals  of  the  price  level,  and  then  periods 
of  depression.  So  long  as  we  use  so  sensitive  an  instrument  as  credit 
in  trade,  no  matter  how  greatly  the  world's  supply  of  gold  is  aug- 
mented, we  need  not  look  for  a  steady  or  orderly  upward  movement 
in  the  prices  of  goods. 

Let  us  consider  a  concrete  case.  Let  us  suppose  that  the 
supply  of  money  in  the  United  States  has  been  greatly  increased 
during  a  certain  month  by  an  influx  of  gold  from  the  mines  of 
Alaska,  California,  and  Colorado.  Most  of  the  miners  will  make 
the  natural  and  reasonable  disposition  of  their  money;  each  will 
spend  more  or  less  for  the  satisfaction  of  his  present  wants;  will 
keep  a  certain  sum  for  the  satisfaction  of  future  wants ;  and  will 
either  lend  the  balance  or  deposit  it  in  a  bank.  That  portion  which 
is  spent  will  constitute  a  new  demand  for  certain  classes  of  goods, 
and  will  tend  to  raise  their  prices.  That  portion  which  is  loaned 
will  be  expended  by  the  borrowers  in  the  purchase  of  goods  and 
payment  of  wages,  and  will  tend  to  advance  both  prices  and  wages. 

Let  us  suppose  that  the  banking  reserves  of  the  country  are 
increased  $50,000,000  by  the  deposits  of  these  miners.  Will  this 
money  lie  idle  and  so  have  no  effect  on  prices?  Certainly  not. 
Tt  will  be  the  most  potent  part  of  the  new  supply.  Bankers  are  the 
last  people  in  the  world  to  look  with  complacence  upon  a  hoard  of 
idle  money.  Their  dividends  depend  upon  their  power  to  make  a 
dollar  do  twofold  or  fourfold  work.  The  banks  that  receive  this 
$50,000,000  of  new  money  will  not  rest  till  they  have  found  bor- 
rowers, even  though  they  are  obliged  to  lower  their  rate  of  discount. 
This  $50,000,000  may  be  made  the  basis  for  an  expansion  of  bank- 
credit  to  the  amount  of  $200,000,006,  or  even  $300,000,000,  and  the 
borrowers  of  this  credit  will  buy  goods  and  labor.     Thus  this  new 


BANKING  REFORM  AND  CURRENCY  SECTION 


437 


gold,  in  the  form  of  currency  or  credit,  will  gradually  increase  the 
demand  for  various  goods,  and  so  cause  their  prices  to  rise.  Since 
there  is  no  reason  why  the  demand  for  goods  should  have  fallen  off, 
the  general  price  level  will  have  been  raised,  indicating  a  decline  in 
the  value  of  money. 

In  the  foregoing  illustration,  I  have  tacitly  assumed  that  none 
of  the  new  gold  is  taken  by  jewelers  and  others  for  use  in  the  arts, 
and  this  assumption  is  justified,  for  there  is  no  reason  for  supposing 
that  the  demand  of  manufacturers  for  gold  will  increase  until  gold 
has  actually  fallen  in  value — that  is,  until  the  prices  of  goods  have 
risen.  Of  the  new  gold  added  to  the  world's  stock  each  year,  it  is 
estimated  that  20  per  cent,  is  absorbed  by  the  arts  demand,  but  there 
is  little  evidence  that  the  consumption  of  gold  in  the  arts  increases 
much  as  the  value  of  gold  falls. 

Prices  never  change  uniformly.  In  a  country  like  the  United 
States,  where  business  is  done  largely  by  the  aid  of  banks,  the  credit 
system  being  highly  developed,  an  increase  of  the  volume  of  money 
affects,  first,  the  prices  of  stocks  and  bonds,  for  these  are  the  articles 
that  are  bought  by  the  man  into  whose  hands  the  money  first 
naturally  comes.  The  prices  of  such  speculative  commodities  as 
wheat,  cotton,  corn,  steel,  etc.,  are  affected  almost  as  quickly ;  not 
the  prices  of  all  at  the  same  time,  but  first  one,  then  another.  If 
there  is  a  great  speculative  interest  in  wheat,  and  little  in  other 
produce,  new  money  and  the  credit  it  supports  may  all  go  for  a 
time  into  the  purchase  of  wheat.  On  the  other  hand,  it  may  all 
go  into  the  stock  market.  After  a  time,  however,  it  will  get  into 
general  circulation  and  affect  the  prices  of  most  commodities,  touch- 
ing first  wholesale  prices,  then  retail,  and  finally  real  estate,  wages, 
and  salaries. 

This  process  of  readjustment  is  a  slow  and  gradual  one.  A 
study  <>f  the  course  of  prices  during  the  last  few  years  (1897-1904), 
when  the  general  level  has  been  lifted  some  25  per  cent,  by  the 
greai  increase  in  the  world's  supply  of  .-old,  will  show  that  some 
articles  have  doubled  in  price;  that  others  have  made  only  a  slight 
advance,  and  that  still  others  have  nol  changed  at  all;  that  wages 
in  some  occupations  have  advanced,  and  that  in  others  the  old  rates 
are  still  paid. 

The  effect  of  increasing  gold   supply  upon   the  rate  of  interest 


438  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

is  an  indirect  one.  It  grows  out  of  the  change  in  prices.  The 
rate  of  interest  in  the  last  analysis  has  no  relation  whatever  to  the 
quantity  of  gold  in  the  country.  It  is  the  product  of  the  demand 
for  and  the  supply  of  capital.  This  word  capital  is  used  by  the 
economists  to  mean  all  those  forms  of  wealth  which  are  used  in  the 
production  of  more  wealth ;  such,  for  example,  as  machinery  and 
raw  materials.  It  includes  all  those  goods  which  are  not  consumed 
directly,  but  which  are  used  to  produce  things  that  people  desire. 
Among  business  men  and  bankers  the  word  has  a  different  meaning. 
It  denotes  a  loanable  fund  for  use  in  business,  and  consists  of  money 
and  credit  in  various  forms.  It  is  important  for  us  to  see  that  the 
business  men  and  the  economists  both  have  in  mind  the  same  thing 
when  they  use  the  word  capital.  The  loanable  funds  in  the  posses- 
sion of  banks  are  all  derived  from  the  loanable  capital  in  the  country. 
When  the  amount  of  loanable  capital  increases,  the  amount  of 
loanable  fund  increases  in  a  responding  degree;  and  there  can  be 
no  real  increase  of  loanable  funds  brought  about  in  any  other  way. 
Banks  create  nothing.  All  their  lending  power  is  the  product  of 
industry.  Every  deposit  of  money  or  credit  in  a  bank  represents 
actual  wealth  or  capital  that  has  been  saved  in  a  community.  The 
loanable  capital  and  the  loanable  funds  of  a  country  are  practically 
the  same  thing:  the  one  a  heterogeneous  mass  of  value  in  the  form 
of  various  goods ;  the  other  the  same  mass  of  value  made 
homogeneous  by  the  universal  solvent,  money.  Nevertheless, 
business  men  usually  think  of  the  rate  of  interest  as  determined  by 
the  money  situation.  They  assume  that  a  high  rate  indicates  a  need 
of  more  money  and  that  a  low  rate  is  due  to  a  plethora  of  money. 
We  have  here  a  confusion  of  money  with  capital  which  has  led  to 
mischievous  legislation  in  the  past  and  is  to-day  the  basis  of  worth- 
less remedies  proposed  for  the  relief  of  the  money  market. 

Although  the  rate  of  interest,  strictly  speaking,  depends  upon 
the  demand  for  and  the  supply  of  capital,  yet  changes  in  the 
supply  of  money  great  enough  to  produce  changes  in  the  prices 
of  goods  are  always  accompanied  by  variations  in  the  rate  of  in- 
terest For  example,  it  is  clear  enough  that  a  large  increase  of 
the  gold  supply,  such  as  that  imagined  a  few  minutes  ago,  must 
cause  a  temporary  decline  in  the  bank  rate  of  discount.  Apparently 
it  increases   the   lending   power  of  banks.     I   say  apparently,   for, 


BANKING  REFORM  AND  CURRENCY  SECTION  439 

mind  you,  it  does  not  in  any  way  increase  the  real  capital  of  the  coun- 
try. The  final  result  will  be  a  rise  of  prices,  and  a  fall  in  the  real  pur- 
chasing power  of  the  dollars  which  are  loaned  by  bankers.  The 
first  effect  of  an  increasing  gold  supply — namely,  a  decline  in  the 
rate  of  interest — will  be  only  temporary  if  the  supply  of  gold 
continues  to  increase  so  that  prices  preserve  an  upward  tendency; 
for  forces  soon  get  to  work  which  tend  to  lift  the  rate  of  interest 
above  the  normal. 

The  uneven  uplift  of  price  has  a  remarkable  psychological 
effect.  Few  men  suspect  that  their  ability  to  sell  goods  at  high 
prices  is  in  any  way  due  to  an  increase  in  the  gold  supply.  Men 
do  not  stop  to  consider  the  fact  that  the  value  of  money  has  changes. 
To  the  business  man  a  dollar  is  a  dollar ;  he  measures  his  prosperity 
in  dollars;  if  the  number  of  dollars  into  which  he  can  convert  his 
property  is  increasing,  he  takes  it  for  granted  that  his  wealth  is 
increasing  at  the  same  pace.  As  a  result,  therefore,  of  a  steady 
upward  tendency  of  prices  and  of  the  consequent  increase  of  what 
may  be  called  the  "money  wealth"  and  "money  profits"  of  business 
and  industry,  men  in  business  are  eager  to  extend  their  operations. 
Newcomers  rush  into  industry  and  business  from  the  professional 
and  other  fields.  Lawyers  turn  promoters  for  the  development  of 
oil  fields  or  for  the  construction  of  street  railways.  Teachers  and 
physicians  abandon  their  callings  and  study  the  A  B  C  of  Wall 
street. 

All  this  rush  into  the  industrial  field  must  evidently  be  accom- 
panied by  an  increased  demand  for  capital,  and  bankers  who  are 
also  affected  by  the  contagion  of  the  time,  find  that  they  can  extend 
their  credit  to  the  utmost  limit  at  an  unusually  high  rate  of  interest. 
In  other  words,  the  increase  in  money  profits  brought  about  by  the 
maladjustment  of  prices  arouses  an  artificial  demand  for  capital, 
and  so  lifts  the  rate  of  interest  above  its  normal  level,  or  that  which 
it  would  have  held  if  prices  had  nol  been  disturbed. 

How  long  the  industrial  body  can  stand  the  effect  of  this  money 
intoxicant,  gradually  administered,  experience  alone  can  decide, 
and  experience  seems  to  teach  the  lesson  that  final  disaster,  how- 
ever long  deferred,  is  inevitable.  It  is  certain  that  no  mere  change  in 
the  relation  between  the  demand  for  and  the  supply  of  money  can 
produce  changes  in  the  wants  of  men  sufficient  to  justify  remarkable 


44Q 


PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 


changes  in  the  production  of  wealth.  All  this  expansion  of  credit 
and  abnormal  demand  for  capital  are  usually  attended  by  a  con- 
fident popular  belief  that  at  last  a  period  of  good  times  has  arrived 
which  can  have  no  end.  Wild  speculation  ensues  in  this  or  that 
commodity — in  real  estate,  in  railroad  stocks,  in  wheat,  in  cotton — 
and  numerous  enterprises  are  undertaken  far  in  excess  of  the  im- 
mediate demand.  Some  morning  a  well-known  firm  or  corporation 
whose  ventures  have  entailed  unusual  risks  is  notified  by  its  bank 
that  some  of  its  outstanding  paper  must  be  taken  up.  Unable  to 
realize  on  its  assets  without  great  sacrifice,  it  calls  upon  some  of  its 
own  debtors  for  payment,  but  they,  too,  are  unprepared  for  im- 
mediate liquidation.  The  next  morning  the  newspapers  announce 
the  suspension  of  that  firm,  and  rumor  runs  through  the  streets 
crying  that  many  other  important  houses  are  affected.  The  more 
timid  creditors  bring  pressure  to  bear  upon  their  debtors  for  pay- 
ment. Another  big  corporation  fails  and  drags  a  bank  down  with 
it.  Then  there  begins  a  general  scramble  on  the  part  of  all  for  the 
payment  of  debts  due  them.  No  man  dares  trust  his  fellow. 
Credit  almost  disappears  from  the  business  world,  and  prices  fall 
with  a  velocity  that  brings  ruin  to  every  weak  bank  and  business 
concern,  and  to  many  others  whose  solvency,  if  no  panic  had  come, 
would  have  been  strongly  buttressed. 

During  this  collapse  and  panic  the  rate  of  interest  rises  to  ab- 
normal heights.  There  is  now  a  scramble  for  loans,  not  for  use  in 
the  production  of  wealth,  but  for  use  in  the  payment  of  debts. 
After  the  panic  is  over  and  the  wreck  has  been  cleared  away,  there 
follows  a  period  of  dullness  and  the  rate  of  interest  will  be  as  much 
below  the  normal  as  it  was  above  it  before  the  panic. 

If  the  money  supply  continues  steadily  to  increase,  the  time  will 
soon  come  again  when  men,  tempted  by  the  low  rate  of  interest 
and  by  restored  confidence  in  the  country's  resources,  will  once 
more  make  the  round  of  borrowing  and  producing.  In  the  mean- 
time, a  new  generation  comes  upon  the  field,  lacking  the  experience 
of  its  elders ;  again  new  enterprises  are  floated ;  and  the  cycle 
of  unwise  production,  speculation,  and  panic  is  repeated. 

Since  1897  the  United  States  has  passed  through  one  of  these 
periods  of  rising  prices,  rising  rate  of  interest,  and  increasing  bank 
deposits.     The  first  check  came  in  1901  and  a  greater  check  in  1903. 


BANKING  REFORM  AND  CURRENCY  SECTION  441 

After  a  year  of  rest  and  recovery  the  country  appears  now  to  be 
swinging  up  on  another  wave  of  prosperity.  Both  reason  and  ex- 
perience unite  in  leading  us  to  expect  that  the  end  of  the  Japanese- 
Russian  war  will  be  followed  by  a  release  of  credit,  another 
upward  shoot  of  prices,  and  a  demand  for  capital  that  will  bring 
large  dividends  to  bankers  all  over  the  gold-using  world.  How 
and  when  this  next  period  of  prosperity  will  end,  depends  very 
much  upon  the  power  of  bankers  to  remain  conservative  and  keep 
their  heads. 

I  am  aware  that  what  I  have  said  is  in  opposition  to  the  common 
view  upon  this  subject.  It  is  usually  taken  for  granted  that  the 
present  outpour  of  gold  is  going  to  result  in  a  decline  of  the  rate 
of  interest.  This  view  I  am  certain  is  a  mistaken  one.  It  rests 
upon  a  superficial  view  of  the  facts.  Had  we  the  time  I  should 
undertake  to  show  you  that  a  decrease  in  the  gold  supply,  or  in  the 
money  supply,  such  as  this  country  endured  between  1810  and  1840, 
must  tend  to  keep  the  rate  of  interest  below  the  normal.  This  part 
of  the  subject,  however,  at  the  present  time  has  only  academic 
interest. 

Lest  you  think  me  altogether  theoretical,  let  me  ask  you  to  con- 
sider briefly  the  statistics  of  the  London  money  market  during  the 
nineteenth  century.  London  adopted  the  gold  standard  in  1816, 
the  price  level  thereafter  being  determined  by  the  value  of  gold. 
The  world's  stock  of  gold  available  for  use  as  money  was  decreas- 
ing between  1810  and  1850,  and  we  should  expect  during  that  period 
a  decline  in  the  London  rate  of  interest.  The  statistics  do  not 
disappoint  us.  In  1824  the  market  rate  in  London  was  3.5  per 
cent.  The  panic  in  1826  made  the  average  rate  for  that  year  4.5 
per  cent.  By  1833  the  rate  had  fallen  to  2.7  per  cent.  There  was 
a  slight  rise  in  succeeding  years,  due  largely  to  the  expansion  of 
credit.  The  panic  of  1839  raised  the  rate  to  5  per  cent.  There- 
after there  was  almost  a  steady  decline  until  the  panic  year  of  1847, 
when  the  rate  rose  to  5.9  per  cent.  In  the  next  five  years  the  rate 
almost  steadily  declined,  until  in  1852  the  average  rate  was  onl)  1.0 
per  cent.     At  this   date   new   supplies  of  gold    from    Australia   and 

lifornia  were  making  their  way  into  Europe,  and  the  interest 
rate  took  an  upward  turn  in  London, being  3.7  per  cent,  in  1853,  4-9 
in  1854,  4.7  in   1855,  5.9  in   1856  and  7.1   in  the  panic  year  1857. 


442 


PRACTICAL  PROBLEMS   IN    ItANKINC  AND  CURRENCY 


The  interest  rate  fell  lo  3.1  in  1858  and  2.5  in  1859,  rates  which 
were  doubtless  below  the  normal.  In  i860  a  rise  began  again, 
the  rate  being  5.5  in  1861  and  6.7  in  1866,  the  next  panic  year. 
Thereafter  there  was  an  immediate  decline,  the  rate  for  1867  being 
2.3  and  for  1868  1.8.  Then  followed  a  slight  advance  of  the  rate 
until  1873,  when  the  average  rate  was  4.5  per  cent.  Here  set  in 
a  gradual  decline  of  prices  due  to  a  relative  decrease  in  the  supply 
of  gold,  the  supply  not  increasing  so  rapidly  as  the  demand.  It 
was  accompanied  in  London  by  a  constant  tendency  of  the  rate 
of  interest  to  fall,  although  there  were  occasional  advances  caused 
by  the  expansion  of  credit.  The  average  market  rate  in  London 
in  i8()4  was  1  per  cent.,  and  in  1895  .8  of  one  per  cent,  per  annum. 
After  1895  the  effect  of  the  new  gold  from  South  Africa  began  to 
be  felt  in  England,  and  the  interest  rate  again  began  an  upward 
journey.  Prices  of  commodities  in  England  between  1896  and  1902 
rose  something  like  25  per  cent.,  and  the  rate  of  interest  rose  from 
eight-tenths  of  1  per  cent,  in  1896  to  4  per  cent,  in  1903. 

I  need  not  take  your  time  to  go  over  the  statistics  of  the  New 
York  market.  Since  1897  prices  in  the  United  States,  according 
to  the  statistics  of  the  Bureau  of  Commerce  and  Labor,  have  risen 
some  25  per  cent.  You  will  know  what  has  happened  to  the  rate 
of  interest.  In  1897  commercial  (double  name  sixty  days)  paper 
sold  in  New  York  around  3^  per  cent.  There  were  only  fifteen 
weeks  during  which  it  rose  above  3^2  per  cent.,  and  it  never  went 
above  4^2  per  cent.  For  sixteen  weeks  it  did  not  rise  above  3 
per  cent.  In  1898  the  rise  of  prices  began  and  the  rate  of  interest 
followed  suit.  It  touched  5  per  cent,  during  nine  weeks,  and  6 
per  cent,  during  seven  weeks.  In  1899  it  reached  5  per  cent, 
during  twelve  weeks,  and  6  per  cent,  during  thirteen  weeks.  It 
averaged  over  4  per  cent,  throughout  the  year.  In  1900  and  1901 
it  averaged  about  4^2  per  cent.,  sinking  below  4  per  cent,  during 
only  a  few  weeks  each  year.  In  1902  the  rate  never  fell  below 
4  per  cent.  The  rate  was  5  per  cent,  and  higher  for  fourteen 
weeks,  and  6  per  cent,  plus  commission  for  twelve  weeks.  In  1903 
the  rate  continued  between  5  and  6  per  cent,  throughout  the  year. 
There  was  a  decline  in  1904,  but  the  rate  closed  the  year  at  4]A. 
This  decline  in  1904  was  the  natural  sequence  of  the  break  in  the 
stock  market  in   1903  and  the   resultant  loss  of  confidence  among 


BANKING  REFORM  AND  CURRENCY  SECTION  443 

business  men.  The  loanable  funds  withdrawn  from  Wall  street 
sought  employment  in  the  world  of  industry  and  trade,  and  a  de- 
cline in  the  rate  of  interest  was  inevitable. 

Conjecture  with  regard  to  the  future  course  of  prices  and  the 
interest  rate  must  take  into  account  the  fact  that  during  the  last 
seven  years  great  commercial  nations  have  been  continuously  at 
war,  and  that  in  consequence  a  normal  expansion  of  credit  has 
been  impossible.  Since  1895  the  gold  holdings  of  the  great  banks 
of  the  world,  including  the  national  banks  of  the  United  States, 
have  increased  by  over  one  billion  dollars;  but  much  of  this  new 
gold,  instead  of  being  given  employment  in  the  world  of  trade 
and  industry,  has  been  hoarded  in  banks  to  provide  for  the  ex- 
traordinary contingencies  of  war,  both  actual  and  possible.  Not 
until  the  world's  peace  is  comparatively  assured,  will  credit  take 
wing  and  bring  all  the  new  gold  into  potential  contact  with  goods 
and  securities.  Concerning  the  precise  effect  upon  prices  and  the 
rate  of  interest,  we  can  only  speculate ;  but  that  prices  must  tend 
upward  and  the  money  market  be  subject  to  violent  disturbances, 
we  can  be  reasonably  certain. 

We  now  come  to  the  third  part  of  my  subject.  Will  the  gold 
supply  of  the  world  continue  to  increase  at  the  present  unprec- 
edented rate?  Is  the  production  to  be  $400,000,000  this  year, 
$450,000,000  next  year,  and  one-half  a  billion  in  1907?  If  such  a 
deluge  of  gold  awaits  us,  it  is  impossible  to  escape  the  conclusion 
that  the  purchasing  power  of  gold  must  suffer  a  great  decline  and 
the  civilized  world  pass  through  an  era  of  wild  speculation  in  the 
stocks  of  corporations  and  in  the  prices  of  commodities.  Fortu- 
nately there  are  some  good  reasons  for  hoping  that  no  such  future 
is  in  store  for  us.  Gold  mining  is  an  industry  in  all  essential  re- 
spects like  other  industries.  Its  output  tends  to  increase  when  the 
value  of  the  product  is  rising,  and  to  decline  when  the  value  of  the 
product  is  falling.  That  the  production  of  any  ordinary  commodity 
tends  to  decrease  when  its  value  is  falling,  is  a  truth  well  under- 
Stood  by  all  business  men.  but  its  applicability  in  the  case  of  gold 
is  not  clearly  ^ccn.  As  we  have  seen,  the  value  of  gold  seems 
stable,  so  that  it  does  not  occur  to  the  average  man  dial  the  profits 
of  gold  mining  are  affected  in  any  way  by  changes  in  the  value  of 
gold.     He  '  arly  enough  thai  the  profits  of  iron  mining  de- 


444    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

pend  upon  the  prices  of  iron,  or  of  copper  mining-  upon  the  price 
of  copper ;  but  the  profits  of  gold  mining  seem  to  him  to  depend 
upon  the  quantity  oi  gold  mined  and  to  vary  as  that  quantity  varies. 
The  owner  of  a  copper  mine  has  his  eye  upon  the  price  of  copper; 
the  farmers  of  Iowa,  Nebraska,  and  Minnesota  are  interested 
in  the  price  of  wheat ;  it  is  upon  these  prices  that  their  profits 
depend,  but  the  gold  miner  studies  no  market  report.  He  will 
find  the  price  of  gold  published  in  no  paper.  Is  he  not,  therefore, 
engaged  in  a  most  unique  industry,  in  one  the  profits  of  which  are 
independent  of  market  fluctuations? 

Curiously  enough,  the  gold  miner  is  more  interested  in  prices, 
though  not  consciously,  than  any  other  purchaser.  He  is  interested 
in  all  prices,  for  the  value  of  his  product  varies  with  every  change 
in  the  price  of  goods  in  general. 

The  relation  of  the  gold  miner's  profit  to  general  prices  can  be 
made  clear  by  illustration.  Let  us  suppose  that  a  man  owns  a  gold 
mine  in  Colorado  from  which  he  is  getting  an  ounce  of  pure  gold 
a  day.  This  gold,  if  we  make  a  slight  deduction  for  the  expense 
of  shipment,  purification,  etc.,  may  be  supposed  to  yield  him  $20. 
How  is  he  concerned  about  the  prices?  Let  us  suppose  that  when 
he  opened  his  mine  the  prices  of  food,  powder,  tools,  etc.,  were  such 
that  his  expenses  were  $10  a  day.  His  daily  profit,  therefore,  was 
$10.  Suppose  that  during  the  course  of  three  years  prices  rise  fifty 
per  cent.  His  daily  expenses  are  now  $15  and  his  profits  have 
been  reduced  one-half.  If  prices  go  on  rising,  bis  profits  will  go  on 
decreasing  until  a  time  will  come  when  he  will  abandon  the  gold  mine 
as  no  longer  profitable,  even  though  in  any  one  day  he  is  able  to  get 
as  much  gold  from  it  as  before.  A  fall  of  general  prices  would 
produce  the  opposite  effect  upon  the  miner's  profits ;  he  would  find 
his  expenses  growing  less  and,  therefore,  his  profits  increasing.  A 
rise  of  prices  would  lessen  the  amount  of  gold  which  he  could  lay 
by  and  also  lessen  its  value  to  him,  for  its  purchasing  power  would 
be  reduced ;  a  fall  of  prices  would  give  him  double  satisfaction :  it 
would  enable  him  to  increase  the  daily  increment  to  his  store  of 
gold  and  would  also  add  to  its  purchasing  power. 

Since  all  gold  miners  must  be  affected  the  same  way  as  our 
single  miner  by  changes  in  the  level  of  prices,  it  is  clear  that  a  rise 
of  prices  must  lessen  the  profits  of  gold  mining,  and  that  a  fall  of 


BANKING  REFORM  AND  CURRENCY  SECTION  445 

prices  must  increase  his  profit.  The  industry  of  gold  mining,  like 
all  industries,  is  carried  on  under  diverse  conditions ;  some  mines 
are  very  profitable,  while  others  barely  pay  the  cost  of  operation. 
At  all  times  mines  are  being  worked  which  yield  only  the  ordinary 
rate  of  profit,  and  these  are  the  ones  first  to  be  abandoned  when 
prices  rise.  These  mines  may  be  called  the  "marginal"  mines,  and 
the  cost  of  mining  gold  in  these  is  the  cost  with  which  the  value  of 
gold  tends  to  conform.  As  the  value  of  gold  falls — that  is,  as  prices 
rise — the  expenses  of  gold  mining  increase,  and  marginal  mines 
are  abandoned.  The  world's  output  of  gold  being  thus  diminished, 
the  rate  of  increase  in  the  world's  stock  of  gold  receives  a  check, 
and  the  downward  tendency  of  its  value  is  also  checked.  On  the 
other  hand,  when  prices  are  falling  because  the  demand  for  gold 
is  outrunning  the  supply,  poorer  mines  are  brought  within  the  field 
of  profitable  operation  and  a  gradual  but  steady  increase  of  the 
annual  output  sets  in.  Furthermore,  since  falling  prices  are  often 
accompanied  by  a  depression  in  many  industries,  the  attention  of  men 
is  more  than  ordinarily  directed  to  the  profits  of  gold  mining,  and 
prospectors  go  out  in  unusual  numbers  in  search  of  new  mines. 
As  a  result,  a  fall  of  prices  is  usually  followed,  not  only  by  an  in- 
creased output  from  old  mines,  but  by  the  discovery  of  new  fields 
of  gold,  the  yield  from  which  finally  so  augments  the  supply  that  the 
value  of  gold  begins  to  fall  and  the  prices  of  goods  rise. 

Evidently  if  we  only  knew  what  profits  were  now  being  made 
in  all  the  gold  mines  of  the  world,  it  would  be  an  easy  matter  to 
discover  the  marginal  mines,  and  determine  how  the  production  of 
gold  would  be  affected  by  any  further  uplift  of  the  general  price 
level.  If  we  should  discover  that  most  of  the  gold  now  taken  from 
the  earth  was  got  out  at  a  cost  of  $10  an  ounce,  we  should  have 
reason  to  expect  a  continual  ion  in  the  recent  large  output,  even 
though  present  prices  nearly  doubled.  Unfortunately  we  have  not 
the  figures  necessary  for  such  an  estimate.  T  learn  from  our 
director  of  the  Mint  that  the  dividends  upon  the   Rand  property  in 

nth  Africa  amount  to  about  30  per  cent,  of  the  product.     About 
\D   per  cent,  of  thi  T1      dwell  mine  in    Alaska   is  distribu! 

in    dividend        Th<     Oriental    Consolidated    Mining    Company    in 

orea  i^-     '  be  making  net  profit  of    [O  per  cent.     Mr. 

Roberts  is  of  the  opinion  that  the  quart/,  mines  of  California  and 


446  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

Cripple  Crook  average  much  less  than  40  per  cent.  This  is  a  phase 
of  the  subject  in  which  further  investigation  is  necessary,  and  the 
results  of  that  investigation  must  be  of  tremendous  consequence 
to  bankers  as  well  as  to  business  men. 

In  the  past  the  production  of  gold  has  been  in  great  cycles,  as 
our  theoretical  consideration  of  the  subject  would  lead  us  to  ex- 
pect. And  these  periods  of  increasing  and  decreasing  production 
have  been  attended  by  corresponding  cycles  of  rising  and  falling 
prices.  Unless  men  find  some  new  way  of  getting  gold  from  the 
earth,  or  discover  mines  where  gold  can  be  quarried  like  iron  or 
coal,  we  have  good  reason  for  expecting  that  the  present  era  of 
abundant  and  cheapening  gold  will  be  succeeded  by  one  of  relative 
scarcity,  and  that  the  course  of  prices  in  the  future  is  destined  to  be 
like  that  in  the  past,  now  falling  for  twenty  years  or  more,  and 
now   rising. 


THE  FINANCIAL  OUTLOOK 

ADDRESS  DELIVERED  BY  FRANK  A.  VANDERLIP,  VICE-PRESIDENT  OF  THE  NATIONAL 
CITY  BANK  OF  NEW  YORK  CITY,  BEFORE  THE  ILLINOIS  BANKERS'  ASSOCIATION, 
AT    THE   LOUISIANA   PURCHASE   EXPOSITION,    ST.    LOUIS,    MO.,    OCTOBER,    I9O4. 

It  has  seemed  to  me  especially  fitting  to  attempt  to  review,  in  the 
briefest  manner,  a  few  of  the  figures  illustrative  of  our  material 
progress,  and  to  try  to  draw  some  deductions  from  them.  In  order 
to  get  a  setting  for  our  comparisons,  let  us  for  a  moment  glance 
back  at  conditions  during  the  last  ten  years.  We  will  remember 
that  we  were,  ten  years  ago,  just  emerging  from  the  depression  of 
the  panic  year  of  1893,  and  that  we  were  facing  a  great  political  and 
economic  conflict  over  the  silver  issue.  The  whole  world  was  filled 
with  distrust  in  regard  to  the  future  of  our  standard  of  value,  and 
the  chilling  shadow  of  that  distrust  was  falling  heavily  on  our  com- 
merce and  finances. 

Then  came  the  definite  verdict  of  the  people,  declaring  for  a 
sound  currency,  and  following  that  began  an  unexampled  era  of 
prosperity  such  as  no  other  country,  in  any  age,  has  ever  known. 
The  expansion  went  beyond  all  the  experiences  of  men  of  affairs. 


BANKING  REFORM  AND  CURRENCY  SECTION  447 

We  had  learned  lessons  of  economy,  of  careful  management,  and  of 
cheap  production  in  the  depression  which  followed  the  panic  of 
1893,  and  now  we  suddenly  wakened  to  the  fact  that  we  had  obtained 
a  grasp  on  the  markets  of  the  world.  Our  exports  of  manufac- 
tures ran  up  from  $183,000,000  to  $433,000,000  in  half  a  dozen 
years,  and  this  increase  of  $250,000,000  in  the  annual  average  of  our 
exports  of  manufactured  products  made  Europe  stand  aghast  at 
what  was  denominated  the  American  commercial  invasion.  Our 
general  foreign  trade  balance  assumed  such  totals  as  to  cause 
economists  seriously  to  consider  what  was  to  happen  to  the  rest  of 
the  industrial  world  if  this  march  of  progress  went  on.  In  half  a 
dozen  years  we  piled  up  against  other  countries  a  trade  balance  in 
our  favor  of  more  than  $2,600,000,000 — a  trade  balance  far  larger 
than  the  net  trade  balance  had  been  from  the  beginning  of  our 
government  down  to  the  time  when  this  remarkable  expansion 
started. 

And  then  we  made  mistakes.  We  were  in  the  midst  of  a  pros- 
perity so  great  that  it  went  beyond  the  experience  of  the  most 
experienced.  With  the  flood-tide  of  this  prosperity  covering  all 
of  the  old  landmarks,  it  was  small  wonder  that  there  were  blunders 
made  in  steering  the  craft  of  business.  We  ran  into  excesses, 
extravagances,  and  miscalculations.  Capital  made  mistakes  of  over- 
capitalization ;  labor  made  mistakes  of  arbitrary  and  unwise  de- 
mands ;  everybody  made  mistakes  of  extravagance.  Producers 
made  errors  in  estimating  the  demand  and  made  miscalculations  in 
the  multiplication  of  their  productive  capacity.  There  was  a  surplus 
demand  above  our  productive  capacity,  and  that  demand  went 
knocking  at  the  door  of  first  one  factory,  then  another  and  another, 
producing  the  impression  on  the  mind  of  each  individual  manufac- 
turer that  the  demand  legitimately  pressing  upon  him  warranted  him 
in  doubling  his  plant ;  and  when  everyone  started  to  double  his  pro- 
ductive capacity,  capacity  soon  ran  ahead  of  demand. 

The  railroads  were  caught  in  much  the  same  situation.  They 
made  huge  engagements  for  expenditures  which  they  felt  were 
necessary  in  order  to  handle  the  traffic  that  was  pressing  on  them. 
For  the  time  being,  far  too  great  a  portion  of  liquid  capital  was 
absorbed  into  fixed  forms  of  investment.  Directly  and  indirectly, 
bank  credits  which  were  payable  on  demand  were,  in  a  dangerous 


448    PRACTICAL  PROIU.FAIS  IN  BANKING  AND  CURRENCY 

proportion,  converted  into  now  manufacturing  plants  and  into  new 
railroads,  tracks,  equipment,  and  terminals.  Bank  reserves  fell 
until  they  were  a  danger  signal  pointing  with  certainty  to  the  need 
for  more  conservative  administration.  Banks  applied  the  financial 
brakes  of  higher  and  higher  interest  rates.  Stock-market  values, 
unduly  inflated  by  the  spirit  of  optimism  which  was  all-pervading, 
began  to  melt. 

Just  two  years  ago  this  turn  came.  The  decline  which  followed 
cut  a  billion  dollars  off  the  value  of  securities  in  a  few  months.  The 
vast  readjustment  which  such  a  change  in  values  made  necessary 
was  accomplished,  however,  without  panic,  without  great  failures, 
and  with  few  of  those  disasters  which  usually  are  the  features  of 
such  a  period.  The  way  the  country  met  the  situation  stands  to-day 
as  the  most  striking  monument  we  have  yet  reared  to  our  increasing 
wealth  and  financial  strength. 

We  have  grown  used  to  cycles  in  business ;  to  regular  periods 
of  expansion  followed  by  years  of  depression.  These  cycles  have 
been  of  varying  length,  but,  generally  speaking,  a  decade  would 
measure  the  time  from  one  upturn  to  the  next.  Men  of  experience, 
therefore,  expected  that  the  depression  which  started  two  years 
ago  would  have  to  run  something  like  the  usual  course,  and  would 
last  at  least  for  three  or  four  years  before  we  had  again  learned 
lessons  of  economy  and  had  settled  down  to  a  solid  basis  upon  which 
to  rear  a  new  structure  of  prosperity.  I  have  said  that  the  expe- 
rience of  the  most  experienced  had  been  set  at  naught  by  the  rising 
tide  that  had  marked  the  last  great  wave.  Experience  proved  a 
poor  guide  in  measuring  the  upturn ;  will  it  likewise  be  at  fault  in 
measuring  the  period  of  depression?  Is  the  depression  to  be  of 
shorter  duration  than  in  former  business  cycles?  Have  we  already 
reached,  after  two  years'  down-grade,  a  level  from  which  we  can 
again  start  up  to  new  heights  of  business  expansion?  I  cannot 
answer  these  questions,  but  I  want  to  present  a  few  statistics  that  I 
believe  have  some  bearing  upon  them. 

What  I  have  now  to  say  has  absolutely  no  application  to  the 
immediate  course  of  the  stock  market.  Whether  stocks  will  be 
higher  or  lower  to-morrow,  next  week,  or  next  month,  I  do  not 
know,  nor  am  T  particularly  concerned.  The  fluctuations  which 
mark  the  little  surface  waves  are  not  matters  of  such  moment.     It 


BANKING  REFORM  AND  CURRENCY  SECTION  449 

has  seemed  to  me,  however,  that  it  will  be  interesting,  in  view  of 
the  present  condition  of  business  affairs,  and  appropriate,  consider- 
ing the  place  which  has  been  chosen  for  this  meeting,  to  make  some 
comparison  of  business  statistics  to-day  with  conditions  of  ten  years 
ago,  and  note  what  our  position  will  be  ten  years  hence,  if  the 
material  development  of  the  United  States  is  to  go  on  at  approxi- 
mately the  same  rate  of  progress  which  has  marked  the  develop- 
ment of  the  last  ten  years.  I  believe  it  is  fair  to  assume  that,  gen- 
erally speaking,  something  like  that  rate  of  progress  will  be  main- 
tained. Certainly  the  outlook  to-day.  with  currency  uncertainty 
giving  way  to  a  securely  fixed  standard  of  value,  with  a  sound  and 
satisfactory  banking  position,  and  with  no  left-over  panic  conse- 
quences to  be  reckoned  with,  as  was  the  case  ten  years  ago — 
certainly  such  a  situation  offers  reason  for  the  presumption  that  we 
are  in  as  favorable  a  position  for  development  in  the  next  ten  years 
period  as  we  were  at  the  beginning  of  the  last. 

Ten  years  ago  we  had  a  population  of  sixty-eight  millions ;  to-day 
it  is  eighty-two  millions;  and  ten  years  hence,  with  this  ratio  of 
increase,  the  population  of  the  United  States  will  be  ninety-eight 
millions.  We  shall  in  the  next  ten  years  add  to  our  number  a  popu- 
lation equal  to  one-half  that  of  France.  Such  growth  in  numbers, 
matched  to  our  wealth  of  resources,  makes  the  sort  of  material  out 
of  which  to  shape  an  entirely  new  level  of  statistics  marking  the 
country's  material  progress. 

The  total  wealth  of  the  United  States,  according  to  the  best 
estimates  which  we  have,  has  risen  in  ten  years  from  $75,000,000,000 
to  $106,000,000,000.  Ten  years  more  of  increase  will  make  the 
wealth  of  this  country  $140,000,000,000.  When  we  remember  that 
such  a  total  will  compare  with  the  total  of  $42,000,000,000  in  1880. 
the  accumulation  is  seen  to  be  at  a  rate  almost  incredible. 

Our  money  stock  has  increased  in  ten  years  from  $1,600,000,000 
to  more  than  $2,500,000,000  and  every  dollar  of  it  is  sound,  and 
every  dollar  of  it  is  on  a  privity  with  l^< >1«1.  The  actual  gold  stock 
itself  increased  in  thai  period  $250,000,000.  If  the  money  stork- 
increases  in  the  nexl  ten  years  in  the  same  amount,  we  shall  have 
$3,400,000,000  of  circulation  at  the  end  of  thai  period.  Incidentally, 
it  is  interesting  to  note  thai  national  bank-note  circulation  in  the 
last  ten  years  has  risen  from  $172,000,000  to  $411,000,000,  and  one 
29 


45° 


PRACTICAL  TROHLKMS  IN  BANKING  AND  CURRENCY 


might  stop  to  wonder,  if  this  rate  of  increase  is  to  go  on,  where  the 
government  bonds  are  to  come  from  in  the  next  ten  years  to  provide 
for  a  further  increase  of  national-bank  circulation  of  $250,000,000  or 
$300,000,000.  Such  inquiry  points  inevitably  to  the  necessity  of 
some  change  in  our  national  banking  laws,  in  the  due  course  of 
time. 

National-bank  deposits  in  ten  years  have  doubled,  going  up 
from  $1,600,000,000  to  $3,300,000,000.  State-bank  deposits  in  that 
time  have  trebled,  marking  an  increase  from  about  $660,000,000  to 
$1,900,000,000.  A  careful  estimate  of  the  total  bank  deposits  in 
the  United  States  to-day — national,  state,  savings  banks,  and  trust 
companies — brings  them  up  to  a  grand  total  of  $10,000,000,000,  and 
that  compares  with  a  total  ten  years  ago  of  $4,600,000,000.  The 
increase  has  been  well  over  double.  Will  it  double  again,  and  shall 
we  have  $20,000,000,000  deposits  in  1914?  If  we  only  make  the 
same  actual  gain,  we  shall  have  over  $15,000,000,000;  and,  barring 
any  unexpected  interference  with  our  expansion,  I  believe  that  that 
is  a  conservative  figure  and  inside  the  probabilities.  Take  the  case 
of  the  institutions  that  each  of  you  represents.  Do  you  not  antici- 
pate as  much  growth  in  the  next  ten  years  as  you  have  had  in  the 
last?  If  you  do,  and  if  those  anticipations  are  fulfilled,  and  the 
increase  is  general,  the  total  of  banking  resources  at  the  end  of 
another  decade  must  certainly  be  an  astounding  one.  Your  own 
banks  in  Illinois  have  far  outstripped  the  average  of  the  country. 
The  total  deposits  of  national  and  state  banks  in  Illinois  have  in- 
creased in  ten  years  from  $213,000,000  to  $572,000,000.  Why 
should  they  not  make  similar  gain  in  the  next  ten  years  and  Illinois 
deposits  stand  at  $800,000,000? 

In  ten  years  we  have  seen  railroad  gross  earnings  increase  from 
$1,200,000,000  to  $1,900,000,000.  With  only  an  equal  actual  in- 
crease, we  shall  have  railroad  earnings  of  $2,600,000,000  ten  years 
from  now ;  while,  if  the  percentage  of  increase  of  the  last  decade 
were  to  be  maintained,  the  figures  would  reach  $3,000,000,000.  The 
lower  total  is  the  fairer  presumption.  With  gross  earnings  reach- 
ing such  a  figure,  however,  with  constantly  improving  methods  of 
administration,  and  with  more  perfect  roadbeds  and  equipment,  we 
may  expect  to  see  steadily  increasing  economy  of  operation.  Is  it 
not  fair  to  presume,  then,  that  these  vast  gross  earnings,  coupled 


BANKING  REFORM  AND  CURRENCY  SECTION  451 

with  a  decreasing  ratio  of  expenses,  will  most  certainly  provide  for 
an  increasingly  satisfactory  return  upon  railroad  investments? 

I  will  not  weary  you  with  too  many  statistics.  If  you  are 
interested  in  pursuing  such  a  line  of  inquiry,  get  the  Monthly  Sum- 
mary of  the  Bureau  of  Statistics  from  Washington.  In  its  way,  it 
is  as  great  an  exposition  of  statistics  as  is  this  World's  Fair  an 
exposition  of  material  things,  and  it  will  well  repay  study.  You 
will  see  from  the  figures  which  you  will  find  there,  for  instance,  that 
our  foreign  trade,  which  ten  years  ago  footed  $1,500,000,000,  was 
this  year  $2,450,000,000.  Our  exports  of  agricultural  products  may 
not  increase  much  from  present  figures,  but  it  is  safe  to  say  that  our 
increasing  command  of  foreign  markets  for  our  manufactures  will 
perhaps  bring  the  total  of  our  foreign  trade  to  $3,000,000,000  in  the 
next  decade.  You  will  see  that  national-bank  loans  and  discounts, 
which  were  under  $2,000,000,000  ten  years  ago,  are  now  $3,725,- 
000,000.  A  similar  increase  would  carry  us  above  $4,500,000,000 
in  national-bank  loans  ten  years  hence.  Let  us  hope  those  loans 
will  not  increase  with  unconservative  rapidity.  Bank  clearings  of 
the  country  have  increased  two  and  one-half  times  in  ten  years.  If 
progress  were  to  continue  at  this  rate,  we  should  show  bank  clear- 
ings of  more  than  $200,000,000,000  at  the  end  of  the  next  ten  years. 
You  will  find  that  the  total  mineral  production  of  the  United  States 
had  increased  in  value  from  $650,000,000  to  double  that  figure.  If 
there  is  reason  to  suppose  that  this  increase  will  continue,  we  shall 
vet  make  a  record  of  $2,000,000,000  as  the  annual  product  of  our 
mines.  Our  production  of  steel  has  doubled  in  ten  years.  The 
value  of  the  product  of  our  cotton-mills  increased  52  per  cent.  The 
volume  of  business,  as  measured  by  the  receipts  of  the  Post-Office 
I  department,  shows  almost  100  per  cent,  increase,  those  receipts 
coming  up  from  $75,000,000  in  1894  to  $144,000,000  for  the  present 
fiscal  year. 

These  illustrations  might  be  definitely  continued,  but  I  have 
given  enough  to  point  out  the  one  conclusion  which  I  wish  to 
emphasize,  and  thai  is  that  you  men  who  administer  the  great  bank- 
ing resource-  of  the  State  of  Illinois  need  to  keep  constantly  before 
you  some  of  these  broad  statistics  of  our  material  progress.  Their 
studv  cannot  help  but  be  encouraging  and  useful.  They  must  lead 
to  the  conclusion  that,  in  the  combination  of  population  and  natural 


(.52  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

resources,   we   stand,   as  a   country,   absolutely  unrivaled,  and   with 
nothing  to  balk  our  progress  but  our  own  mistakes. 

If  we  look  abroad,  we  see  Kngland  struggling  under  most  ad- 
verse conditions,  a  greal  portion  of  her  industrial  population 
actually  underfed,  and  a  million  people  receiving  aid  under  her 
poor-laws.  We  see  in  France  a  nation  grown  ricb  by  thrift,  a 
nation  where  economy  bad  become  a  disease,  and  in  tbe  growth  of 
it  all  initiative  for  new  accomplishments  has  been  lost.  In  Italy 
we  see  a  great  industrial  awakening,  but  conditions  still  so  hard 
that  a  large  percentage  of  our  800,000  of  immigrants  annually  come 
from  that  country.  In  Germany  we  find  a  barren  land  yielding 
from  the  fields  most  meagerly  and  from  the  mines  hardly  at  all, 
but  with  a  population  whose  energy,  intelligence,  and  education 
have  built  out  of  most  discouraging  conditions  a  vast  industrial 
organization  which  is  our  one  real  competitor  in  the  markets  of  the 
world.  If  we  will  accept  from  the  Germans  something  of  their 
scientific  methods,  their  carefulness,  their  thoroughness,  and  their 
willingness  for  hard  work,  and  bring  such  qualities  to  bear  upon 
our  own  resources,  the  figures  which  I  have  been  quoting  as  pos- 
sibilities of  the  future  will  yet  look  small. 

These  statements  are  generalities  intended  to  apply  only  over 
considerable  periods.  That  the  next  ten  years  are  to  see  to  some 
extent  a  repetition  of  the  development  of  the  last  ten  is,  I  think, 
a  fair  presumption.  Whether  that  upward  movement  has  already 
started,  or  whether  it  is  to  start  next  month  or  next  year,  I  do  not 
profess  to  know,  and  nothing  that  I  have  said  should  be  taken  as 
indicating  the  fixing  of  a  definite  date  in  regard  to  returning  pros- 
perity. Business  to-day  is  unsatisfactory  in  many  respects.  The 
memories  and  sore  spots  which  the  declines  of  the  last  two  years 
have  left  will  make  many  people  slow  in  accepting  the  conclusion 
that  we  are  ready  for  another  great  commercial  advance.  We  are 
always  in  danger  of  overdoing,  and  we  may  for  the  moment, 
perhaps,  have  already  made  that  error,  for  prices  have  shown  most 
substantial  recovery — a  recovery  certainly  in  advance  of  what  would 
be  warranted  by  the  present  actual  conditions.  It  is  safe  to 
say,  however,  that  we  are  to-day  in  a  sound  financial  position. 
Bank  reserves  are  ample ;  at  least  national-bank  reserves  are. 
Bank  loans  and  discounts  are  not  of  a  character  to  offer  grounds 


BANKING  REFORM  AND  CURRENCY  SECTION 


453 


for  any  general  criticism.  We  have  probably  fully  paid  off  the 
foreign  indebtedness  in  the  shape  of  finance  bills  which  two  or  three 
years  ago  had  reached  large  totals.  We  are  in  a  position  to  com- 
mand international  credits,  and  to  bring  gold  to  strengthen  our 
reserves,  if  we  should  need  it.  We  have  a  corn  crop  that  is  worth 
$1,000,000,000,  a  cotton  crop  worth  $600,000,000,  and  a  wheat  crop 
worth  $412,000,000.  The  value  of  these  three  crops  alone  this  year  is 
$2,012,000,000,  which  compares  with  the  value  of  these  same  crops 
ten  years  ago  of  $1,067,000,000. 

We  have  learned  some  valuable  lessons  in  finance,  and  the  mem- 
ory of  the  last  two  years,  reminding  us  of  the  results  of  the  mistakes 
made  at  the  height  of  the  boom  period,  is  still  keenly  enough  in  our 
minds  to  warrant  the  belief  that  we  shall  administer  our  financial 
affairs  with  a  fair  degree  of  common-sense  for  some  time  to  come. 
We  have  learned  that  there  is  not  a  new  political  economy,  but  that, 
in  spite  of  our  vast  resources,  our  growing  wealth,  and  our  re- 
cuperative power,  we  must  obey  the  same  old  sound  laws  of  finance 
and  commerce  that  have  long  ruled. 

I  am  convinced  that  the  possibilities  of  another  great  business 
expansion  are  at  hand,  but  connected  with  those  great  possibilities 
are  great  responsibilities.  Those  responsibilities  are  largely  on  our 
shoulders.  The  bankers  of  this  country  will,  in  the  wisdom  of  the 
administration  of  their  trust,  or  in  their  lack  of  wisdom,  have  great 
influence  on  the  beginning,  the  extent,  and  the  length  of  this  next 
period  of  prosperity. 

I  cannot  too  strongly  emphasize  my  belief  in  the  importance 
of  having  our  banks  and  financial  interests  prepared  to  play  their 
proper  part  in  the  return  of  prosperity  and  the  further  development 
of  business.  We  need  banking  laws  that  are  wise  and  banking  ad- 
ministration that  is  wise.  Encouragemenl  to  a  wild  speculative 
I"  om,  at  this  time,  when  improvement  is  justified  more  by  hopes 
and  possibilities  than  by  immediate  actual  conditions,  might  set 
the  whole  period  of  recovery  had;  a  month,  six  months,  a  year.  A 
great  speculative  boom  now  is  not  what  is  needed.  It  is  indeed 
one  of  the  -|)ccial  dangers.  If  bankers  in  the  greal  centers  are  con- 
servative in  the  inducements  they  hold  oul  to  secure  deposits,  and 
accumulate  great  .stock  of  money  which  will  loan  at  such  low  rates 


454 


PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 


as  to  encourage  unduly  a  speculative  spirit,  they  will  strike  a  blow 
at  this  returning  prosperity  which  may  long  delay  its  coming. 

There  is  another  danger  in  the  banking  situation.  During  the 
heights  of  the  last  commercial  expansion  people  so  lost  their  heads 
as  to  excuse  their  extravagant  and  foolish  actions  by  saying  that 
there  was  a  new  political  economy,  that  the  old  laws  no  longer  ap- 
plied under  the  new  conditions.  They  were  wrong,  lamentably 
wrong.  And  to-day  a  thing  for  bankers  of  this  country  to  remem- 
ber is  that  there  have  been  discovered  no  new  laws  of  finance  which 
make  banking  without  reserves  safe  and  conservative.  A  bank 
holding  money  repayable  on  demand  must  keep  a  fair  proportion 
of  that  money  in  its  vaults.  The  experience  of  all  financial  history 
points  to  that  necessity.  Whenever  that  law  has  been  violated, 
disaster  has  ultimately  followed.  Do  not  permit  yourselves  to  be- 
lieve that  there  has  been  any  new  discovery  in  finance  which  will 
safely  permit  banking  without  reserves. 

I  believe  that  the  conditions  are  again  favorable  to  a  return  of 
prosperity.  I  believe  it  is  time  for  optimism.  So  long  as  we  re- 
member in  humbleness  our  mistakes  and  hold  close  to  a  proper  con- 
servatism, the  course  of  financial  events  seems  likely  to  follow  only 
one  general  direction,  and  that  is  toward  improvement,  toward 
expanding  business.,  and  toward  better  times. 


PART  III 

TRUST  COMPANY  SECTION 


THE  TRUST  COMPANY  AS  A  FACTOR  IN  THE 
FINANCES  OF  THE  NATION 

ADDRESS  DELIVERED  BY  FESTUS  J.  WADE,  PRESIDENT  OF  THE  MERCANTILE  TRUST 
COMPANY  OF  ST.  LOUIS,  BEFORE  THE  FIRST  CONVENTION  OF  THE  MASSACHU- 
SETTS BANKERS'  AND  TRUST  COMPANY  ASSOCIATION,  AT  BOSTON,  JUNE  21, 
I905. 

The  trust  company  is  not  only  an  established  American  institu- 
tion, but  one  which,  if  its  growth  continues  in  the  next  decade  as 
it  has  in  the  past,  with  its  combined  force  will  shortly  rival  in  point 
of  actual  resources  that  of  the  great  national  banking  system  of 
this  government.  Doubtless  such  a  statement  will  greatly  surprise 
many  who  have  given  little  consideration  to  the  remarkable  de- 
velopment of  trust  companies  throughout  the  United  States  in  the 
past  ten  years.  The  trust  companies,  being  state  institutions,  have 
no  federal  department  to  which  they  are  obliged  to  make  annual 
reports,  and  therefore  statistics  as  to  the  number  in  existence,  their 
capital,  surplus,  undivided  profits,  deposits,  and  total  resources,  are 
not  as  accurately  collected  as  in  the  national  banking  system.  The 
following  quotation,  however,  from  the  report  of  the  Secretary  of 
the  Treasury  to  Congress  last  December  shows  that  the  growth  of 
the  trust  companies  during  the  past  few  years  has  greatly  exceeded 
in  percentage  the  increase  of  national  banks  of  the  United  States. 
The  Secretary  states : 

Within  the  last  few  years  trust  companies  have  made  a  relatively  much 
larger  growth  in  all  the  large  cities  than  national  hanks.  There  were  twenty- 
seven  trust  companies  and  forty-nine  national  hanks  in  New  York  City  ten 
years  ago.  The  same  city  now  has  forty-seven  trust  companies  and  only 
forty-one  national  hanks.  Ten  years  ago  the  aggregate  capitalization  of  the 
New   York  City  trt  a  as  $26,400,000,  and   of  national   banks  $50,- 

700,000.      Now    the    trust     compan:  capitalized    at     $5l.<^K),ooo    and    the 

national  hanks  at  S :  1  o.^oo.ooo,  showing  about  the  same  relative  increase. 
But  the  difference  in  the  growth  of  deposits  i;  marked.  Trust  companies 
in  New  York  City  held  less  than  $260,000,000  ten  yens  ago,  and  they  now 
hold  in-. re  than  $^75,000,000,  while  depo  its  in  national  banks  have  increased 
from  mere  ihnn  $550,000,000  to  .1  fraction  less  than  $1,100,000,000.  Thus, 
trust-company  deposits  show  an  ite  growth  of  $05,000,000  more  than 

national  bank  depo  rth  -1    40  per  cent,  as  against  100  per  cent, 

in  national  banks. 

457 


458  PRACTICAL  PROBLEMS  IN  RANKING  AND  CURRENCY 

In  Chicago  the  number  of  trust  companies  has  increased  in  ten  years  from 
eight  to  twelve,  while  the  number  of  national  banks  has  decreased  from 
twenty-one  to  twelve.  The  capitalization  of  trust  companies  in  Chicago  in 
the  same  period  has  increased  from  $4,000,000  to  $20,000,000,  or  400  per  cent. 
as  against  an  increase  of  25  per  cent,  in  the  capitalization  of  national  banks. 
Deposits  in  these  trust  companies  have  increased  from  $15,000,000  to  $230,- 
000.000  in  ten  years,  and  in  national  banks  from  $130,000,000  to  $280,000,000, 
or  an  aggregate  increase  of  $215,000,000  in  trust  companies  as  against  $150,- 
000,000  in  national  banks,  and  an  increase  of  1,400  per  cent,  in  trust  com- 
panies as  against  115  per  cent,  in  national  banks. 

Other  large  cities  exhibit  similar  conditions.  Many  trust  companies  hold 
commercial  accounts  and  are  regularly  engaged  in  discounting  paper,  and 
they  hold  in  the  aggregate  more  than  $2,000,000,000  in  deposits. 

It  should  be  borne  in  mind  that,  although  the  report  of  Secre- 
tary Shaw  to  Congress  was  made  in  December,  1904,  the  statistics 
above  quoted  are  for  the  fiscal  year  ending  June  30,  1904.  In  no 
year  in  the  past  decade  has  the  growth  been  more  marvelous  in 
the  strength  and  development  of  the  trust  companies  than  during  the 
past  twelve  months,  and  the  most  accurate  data  obtainable  at  this 
time  will  show  that  there  are  1,438  trust  companies  in  existence, 
278  of  which  were  organized  since  June  30,  1904.  In  addition  to 
the  above,  at  least  400  companies  employ  the  title  of  "trust  com- 
pany" which  are  not  properly  institutions  of  this  character. 

Few  realize  the  financial  development  of  the  Middle  West,  and 
especially  its  financial  center,  the  city  of  St.  Louis.  The  aggregate 
capitalization  of  the  banks  and  trust  companies  of  St.  Louis  on  June 
1,  1905,  was  more  than  the  aggregate  capital  of  the  national  banks 
and  trust  companies  of  New  York  City  ten  years  ago.  It  equals 
the  capitalization  of  all  the  banks  and  trust  companies  of  Chicago, 
and  is  practically  equal  to  that  of  Boston. 

According  to  the  latest  statistics,  the  banking  power  of  the 
world  is  $33,608,000,000,  of  which  $13,826,000,000  is  represented 
by  United  States  banks.  The  resources  of  the  trust  companies  of 
the  United  States  aggregate  more  than  $3,250,000,000,  which  is 
over  23  per  cent,  of  the  banking  power  of  the  United  States,  and 
practically  10  per  cent,  of  the  banking  power  of  the  world.  Secre- 
tary Shaw's  suggestion  in  his  report  to  Congress  is  very  timely, 
when  he  points  out  the  importance  of  giving  trust  companies  the 
privilege  of  incorporating  under  federal  law.  If  such  a  law  should 
be  enacted,  a  requirement  should  be  placed  upon  the  trust  companies 


TRUST  COMPANY  SECTION  459 

in  the  matter  of  reserves.     The  stronger  their   reserve,  the  greater 
their  strength. 

The  ratio  of  increase  of  the  banking  power  of  the  world  in  the 
last  fourteen  years  is  no  per  cent.  The  ratio  of  increase  of  the 
banking  power  of  the  United  States  in  the  past  fourteen  years  is 
168  per  cent.  The  ratio  of  increase  in  individual  deposits  of  the 
national  banks  in  the  past  twelve  years  is  90  per  cent.  The  ratio 
of  increase  in  individual  deposits  of  the  trust  companies  of  the 
United  States  in  the  last  twelve  years  is  390  per  cent.,  and  the  in- 
dividual deposits  of  the  trust  companies  on  June  1,  1905,  were  within 
a  few  million  dollars  of  the  individual  deposits  of  the  national  banks 
of  the  United  States  in  1892. 

When  one  stops  to  consider  that  the  trust  companies  of  the 
United  States  in  their  combined  resources  represent  more  than  23 
per  cent,  of  the  banking  resources  of  the  United  States,  and  prac- 
tically 10  per  cent,  of  the  banking  resources  of  the  world,  the  im- 
portance of  the  trust  company  to  this  government  is  forcefully 
impressed  upon  one's  mind.  It  is  within  the  past  decade  that  the 
British  consol,  primarily  on  account  of  the  war  in  South  Africa, 
dropped  not  only  below  par,  but  as  low  as  eighty-six  cents  on  the 
dollar.  Within  the  past  six  months  Japan  and  Russia  were  obliged 
to  sell  their  securities  on  a  higher  basis  than  6  per  cent,  interest 
per  annum.  It  may  be — it  is  certainly  within  the  realm  of  pos- 
sibilities— that  the  financial  requirements  of  this  government  as  a 
nation,  through  war  with  some  powerful  foreign  government,  may 
tax  the  resources,  not  only  of  the  government  itself,  but  of  all  its 
financial  institutions  to  the  fullest  extent.  Great  Britain,  France, 
Germany,  Russia,  Japan,  China,  and  the  United  States  have  all 
gone  through  such  periods  within  the  recollection  of  everyone 
present.  Should  such  a  misfortune  befall  us  in  the  next  ten,  twenty, 
thirty,  or  forty  years,  will  not  the  government  need  the  assistance 
of  what  is  to-day  over  23  per  cent,  of  the  banking  power  of  this 
country,  and  what  i-  destined  to  be  one  of  its  strongest  financial 
factors?  The  interest-bearing  debt  of  the  United  States  govern- 
ment is  less  than  $900,000,000.  Its  securities  are  rated  the  highest 
of  any  nation  in  the  world;  the  government  does  not  need  the  as- 
sistance of  the  trust  companies  at  this  time.  Yet  it  is  only  a  few 
decades  ago  when  the  debt  exceeded  $2,700,000,000,  and  the  secuii- 


46o    PRACTICAL  PROBLEMS  IN  RANKING  AND  CURRENCY 

ties  of  the  government  sold  at  less  than  fifty  cents  on  the  dollar. 
The  interest-bearing  debt  of  New  York  City  to-day  exceeds  $460,- 
000,000 — more  than  one-half  of  the  interest-bearing  debt  of  the 
United  States.  The  City  of  New  York  needs  the  trust  company 
to-day  to  assimilate  its  securities  in  order  that  they  may  sell  their 
ZlA  Per  cent-  bonds  at  a  premium. 

The  live,  active,  energetic  banker,  be  he  state  or  national,  in  all 
the  large  centers  of  this  country,  has  recognized  the  value  of  trust 
companies  for  the  accumulation  of  idle  money,  for  the  development 
of  commerce,  and  for  the  enlargement  of  the  financial  horizon  of 
the  United  States  of  America.  Many  of  the  larger  national  banks  are 
/  financially  interested  in  trust  companies  in  the  larger  centers ;  some 
of  the  more  progressive  have  organized  trust  companies  and  are 
running  them  in  connection  with  their  national  banks  practically  as 
departments.  It  is  only  a  very  short  period  of  time  until  the  trust- 
company  official,  keeping  pace  with  the  procession  of  the  national- 
bank  official,  will  add  a  national  bank  practically  as  a  department 
to  the  trust  company. 

In  the  western  country,  at  least,  the  trust  company  occupies  the 
same  relation  to  the  masses  of  the  people  that  the  savings  bank 
does  to  the  East.  Very  few  western  states  have  savings  banks,  the 
reason  being  that  the  trust  company  in  the  western  states  runs  a 
department  for  savings,  and  such  a  department  is  in  itself  a  savings 
bank  of  and  for  the  people,  where  the  thrifty  son  of  toil  may  de- 
posit his  dollar  a  day,  week,  month,  or  year,  and  receive  thereon 
interest  varying  from  3  to  4  per  cent.,  with  the  entire  capital,  sur- 
plus, and  undivided  profits  of  the  trust  company  to  protect  him 
against    loss. 

The  trust  company  should  not  only  keep  a  reserve,  but  a  strong 
reserve.  While  it  was  well  enough  years  ago,  when  the  trust 
companies  simply  discharged  the  functions  of  trustee,  registrar, 
executor,  and  administrator,  for  them  to  keep  a  nominal  amount 
of  cash  on  hand,  with  a  comparatively  small  amount  on  deposit  with 
banks,  that  condition  has  now  ceased  to  exist,  and  is  so  recognized 
to-day.  The  methods  applied  to  trust  companies  ten,  fifteen,  or 
twenty  years  ago  are  not  applicable  to-day,  nor  are  trust  companies 
doing  business  on  the  lines  established  ten,  fifteen,  or  twenty  years 
ago.     If  you  will  show  me  the  trust  company  to-day  which  keeps 


TRUST  COMPANY  SECTION  461 

a  reserve  both  in  cash  and  in  bank  in  comparison  with  the  successful 
national  banker,  I  will  show  you  the  trust  company  that  not  only 
pays  its  stockholders  a  handsome  return,  but  that  is  constantly  de- 
veloping its  business.  The  surest  way  to  retard  the  growth  of  a 
trust  company  is  to  decrease  its  reserve.  The  most  certain  way  to 
develop  its  resources  and  power  is  to  increase  its  reserves. 

Well-balanced  trust-company  officials  invite  publicity  and  fre- 
quent examinations,  not  only  by  the  company's  auditing  committee, 
but  by  expert  accountants  as  well.  The  trust-company  official  who 
fears  frequent  publication  of  the  condition  of  his  institution,  and 
who  does  not  encourage  frequent  examination  of  his  work  and  the 
assets  of  his  corporation,  is  unjust  to  himself,  his  associates,  and 
his  corporation. 

The  interest  of  the  national  and  state  banks  and  the  trust  com- 
panies are  reciprocal.  Examine  the  bank  statistics  of  any 
financial  center  in  the  East,  West,  North  or  South,  and  where  you 
find  a  great  development  of  financial  resources,  there  you  will  find 
the  trust  company  not  only  doing  its  part  for  the  development  of 
that  particular  section,  but  also  paying  handsome  returns  to  its 
stockholders  upon  the  capital  invested.  The  national  and  state 
bankers,  where  they  are  progressive,  although  competitors,  are  all 
working  along  the  same  lines.  Of  the  $4,500,000,000  of  deposits 
carried  by  the  national  banking  system,  practically  10  per  cent,  of 
the  entire  amount  are  the  deposits  of  trust  companies.  The  most 
cordial  relations  should  always  exist  between  banks  and  trust-com- 
pany officials.  Continue  to  encourage  it  as  you  have  by  this  meet- 
ing in  joint  session  ;  each  will  be  greatly  benefited,  and  the  interest 
of  both  the  bank  and  the  trust  company  greatly  advanced. 


462     PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

NATIONAL   BANKS   AND  THE  TRUST   COMPANY 

PROBLEM 

ADDRESS  DELIVERED  BY  EUGENE  E.  TRUSSING,  OF  TRUSSING,  BROWN  &  KING, 
CHICAGO,  BEFORE  THE  AMERICAN  BANKERS*  ASSOCIATION,  AT  NEW  YORK, 
SEPTEMBER,    IQO.J. 

The  purpose  of  this  paper  is  briefly  to  consider  the  situation 
which  has  arisen  in  the  last  fifteen  years,  though  it  has  only  recently 
become  acute  in  its  manifestations,  and  which  has  been  not  inaptly, 
though  not  quite  accurately,  called  the  "trust-company  problem." 
It  is  considered  safe  to  assume  in  this  audience  not  only  the  ex- 
istence, but  also  the  importance,  of  the  problem.  The  first  con- 
sideration is  to  define  its  character ;  the  second  is  to  learn  its  cause 
and  history ;   and  the  third  and  last,  to  suggest  a  possible  remedy. 

Broadly  speaking,  it  may  be  defined  to  be  the  anomalous  condi- 
tion of  affairs  which  permits  the  existence  in  the  same  community, 
side  by  side,  of  two  classes  of  banking  institutions,  competing  for 
practically  the  same  business — namely,  deposits — one  of  which  is 
quite  strictly  limited  in  respect  to  its  investments  and  guarded  by 
definite  requirements  in  respect  to  its  cash  reserve,  while  the  other 
is  practically  free  from  both  these  wholesome  restraints.  These 
two  competing  classes  are  the  national  banks,  organized  under  the 
National  Banking  Act,  on  the  one  hand,  and  the  state  banks  and 
trust  companies,  organized  under  state  laws,  on  the  other. 

The  situation  is  peculiar  to  this  country;  it  does  not,  nor  did 
it  ever,  exist  in  European  countries ;  its  essential  characteristic 
is  legal.  The  reason  for  its  existence  is  to  be  found  in  our  dual 
form  of  government,  our  separation  of  state  and  national  affairs, 
and  the  questions  of  policy  arising  therefrom.  The  existence  of  the 
problem  has  little  or  nothing  to  do  with  the  nature  of  the  banking 
business.  Technically  speaking,  from  the  standpoint  of  banking 
science,  it  is  an  accident. 

Its  immediate  cause  lies  in  the  failure  of  the  National  Banking 
Act  to  give  national  banks  power  as  broad  as  those  given  to  the 
state  banks  and  trust  companies  by  the  banking  laws  of  the  various 
states  enacted  in  recent  years,  and  commensurate  with  the  modern 
requirements  of  the  business.  The  National  Banking  Act  pro- 
vides for  only  commercial  banks,  which  were  the  chief  need  of  the 
public  at  the  time  of  its  enactment.     Since  its  enactment  new  and 


TRUST  COMPANY  SECTION  463 

great  public  needs  have  arisen,  which  the  national  banks  have  not 
been  able  to  meet. 

The  main  point  in  the  situation  is  this :  State  banks  and  trust 
companies  generally  are  authorized  to  do  a  general  banking  busi- 
ness— that  is  to  say,  to  receive  deposits  from  and  make  loans  to, 
commercial,  savings,  trust,  and  all  other  customers — while  the 
national  banks  are  confined  to  a  limited  banking  business,  and  are 
authorized  to  make  only  commercial  loans,  and  thus  practically, 
though  not  legally,  to  receive  only  commercial  deposits.  All  other 
deposits  naturally  tend  to  the  state  banks  and  trust  companies. 

Broadly  speaking,  state  banks  and  trust  companies  are  not 
regulated  by  law  in  their  investments  and  loans,  and  there  is  prac- 
tically no  requirement  as  to  their  cash  reserve,  while  the  national 
banks  are  closely  guarded  by  law  in  both  respects.  If  the  national 
banks  as  a  class  are  to  maintain  their  positions  as  the  leaders  in  the 
business,  something  radical  must  be  done  with  the  legal  situation 
thus  created.  The  question  is:  How  should  this  be  done?  The 
facts  necessary  to  a  consideration  of  the  situation  are  these : 

Our  national  banks  are,  legally  speaking,  the  result  of  an  ex- 
ercise of  the  powers  of  the  federal  government  with  respect  to  war 
and  the  currency,  for  the  purpose  of  aiding  the  government  in  the 
great  operations  involved  in  borrowing  money  for,  and  paying  the 
expenses  of,  the  War  of  the  Rebellion.  When  they  were  created, 
their  existence  was  regarded  by  many  as  temporary.  Their  con- 
tinuance for  forty  years  after  the  close  of  the  war,  in  times  of  peace, 
is  evidence  of  their  value  as  instruments  of  commerce  and  their 
helpfulness  in  furthering  the  prosperity  of  the  nation.  The  means 
they  were  to  employ  in  aiding  the  government  were  to  issue  cur- 
rency based  upon  the  deposit  of  government  bonds  purchased  by 
the  bank.-;,  and  to  facilitate  the  sale  of  government  bonds  to  the 
public.  As  an  incident  to  this  business  they  were  authorized  to 
receive  deposits  of  money,  but  were  authorized  to  loan  money  only 
upon,  or  in  discount  of,  commercial  paper  and   hills  of  exchange. 

These  limited  powers  have  placed  them  at  a  disadvantage  in 
modern  flays,  when  the  demands  of  the  public  for  savings  bank's. 
trust  companies,  and  other  financial  agencie  have  largely  increased 
the  field  of  banking  operations,  so  thai  to-day,  instead  of  being  far 
and   away  the   leaders   in  financial  affairs,  they   are  struggling   for 


464    PRACTICA]    PROBLEMS  IN  BANKING  AND  CURRENCY 

place  and  are  obliged  to  ally  themselves  with  institutions  of  the 
trust-company  class  to  maintain  a  fair  position  with  the  leaders 
in  the  financial  world. 

The  reason  for  this  situation  is  not  far  to  seek,  and  the  remedy 
is  an  obvious  one,  but  the  difficulty  in  bringing  the  two  together, 
and  thus  relieving  what  may  become  a  public  misfortune,  may  not 
be  easy.  Reforms  of  a  financial  character  involving  national  legis- 
lation, though  in  merely  administrative  or  other  subordinate  affairs, 
are  very  slow  of  enactment.  They  require  a  long  campaign  of 
education  to  arrive  at  an  understanding  on  the  part  of  even  our 
legislators,  for  the  subject  is  to  most  of  them  terra  incognita,  and 
the  public  has  an  undefined  fear  of  anything  the  national  banker 
wants. 

That  an  expansion  of  the  powers  of  national  banks  has  become 
a  necessity  to  the  legitimate  exercise  of  their  functions  as  parts  of  the 
machinery  of  the  national  government  should  require  no  long  argu- 
ment. A  statement  of  the  present  powers  of  national  banks, 
coupled  with  a  short  historical  review  of  the  development  of  the 
general  banking  business,  which  has  resulted  from  the  needs  of 
our  government  and  people  since  national  banks  were  first  estab- 
lished, will  easily  demonstrate  the  fact,  and  should  arouse  a  demand 
that  the  undisputed  powers  of  the  national  government  should  be 
exercised  to  give  its  sanction  to  the  grant  of  further  authority  to 
these  institutions,  commensurate  with  modern  requirements. 

The  refunding  operations  after  the  war  justified  the  continua- 
tion of  the  national  banking  system  when  the  first  charters  began 
to  expire  in  1884,  and  a  renewal  of  charters  was  granted.  Since 
then  these  institutions  have  become  so  thoroughly  a  part  of  the 
government  machinery  and  a  necessity  to  the  public  that  their 
abandonment  would  be  regarded  as  a  long  step  backward. 

The  science  of  banking  at  the  time  of  the  establishment  of  na- 
tional banks  was  at  a  very  low  ebb.  It  had  not  progressed  very 
far  in  this  country  at  any  time,  though  the  subject  of  much  political 
contention  and  legislative  action.  The  panic  of  1875  and  the 
breaking  up  of  commercial  relations  with  the  South  at  the  begin- 
ning of  the  war,  with  the  consequent  great  losses  to  all  engaged  in 
commercial  pursuits,  especially  banking,  had  reduced  the  number 
of  banks  and  their  operations   to  an  almost  irreducible  minimum. 


TRUST  COMPANY  SECTION  465 

The  financial  needs  of  the  country  were  being  served  by  a  compara- 
tively few  survivors  of  the  commercial  state  banks,  the  New  Eng- 
land and  New  York  savings  banks  and  their  imitators  in  some  of 
the  other  states,  private  bankers  of  various  kinds,  and  a  very  few, 
perhaps  six,  trust  companies. 

The  needs  of  the  country  during  and  immediately  following 
the  war,  the  profitable  privileges  conferred  upon  the  national  banks, 
the  patriotic  sentiments  which  both  inspired,  the  successful  manage- 
ment of  these  banks,  and  their  careful  supervision  by  the  national 
government,  in  spite  of  a  number  of  disastrous  failures  among  the 
banks,  created  public  confidence,  and  naturally  resulted  in  the 
growth  of  the  national  banking  system,  until  it  became  the  chief 
financial  element  of  the  country;  and  until  1890  it  was  without  a 
serious  competitor  in  its  leadership  in  financial  affairs. 

In  the  early  eighties,  the  United  States  had,  financially  speak- 
ing, recovered  from  the  disastrous  effects  of  the  war,  and  the  panic 
of  1873 ;  we  were  rapidly  paying  off  the  national  debt,  and  the 
people  were  accumulating  a  surplus.  The  need  of  investment  for 
this  surplus,  which  no  longer  found  lodgment  in  government 
securities,  created  a  demand  for  proper  agencies,  especially  in  the 
East  and  Middle  West,  and  the  limitations  then  as  now  existing 
upon  the  powers  of  national  banks  turned  the  thoughts  of  enterpris- 
ing persons  into   other   channels. 

State  banks  had  been  almost  wholly  abandoned,  because  their 
profitable  feature  of  issuing  bank-notes  had  been  taxed  out  of  ex- 
istence by  the  National  Ranking  Act.  A  few  exceptions  in  some 
of  the  states,  notably  Illinois,  maintained  their  existence  chiefly  as 
savings  banks,  or,  if  engaged  in  commercial  business,  were  sus- 
tained by  reason  of  the  extraordinary  character  of  their  stock- 
holders or  officers  or  both. 

In  New  England  and  the  middle  eastern  states  savings  banks 
of  an  especial  type  had  grown  up,  and,  besides  these  and  the  na- 
tional banks,  perhaps  a  dozen  of  institutions  known  as  trust  com- 
panies had  been  established  under  state  charters,  and  in  nearly  every 
instance  had  flourished.  These  trust  companies  were  really  bank- 
ing institutions.  The  name  "trust  company"  did  not  truly  describe 
the  chief  part  of  their  business;  they  received  deposits,  which  they 
mixed  witli  their  own  funds,  and  for  which  they  became  bankers 
30 


466  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

and  not  trustees.  These  deposits,  however,  were  then  of  a  peculiar 
character  in  two  respects — viz.,  they  were  not  payahle  on  demand 
and  they  bore  interest.  They  were  usually  taken  upon  certificates 
of  deposit,  payable  generally  upon  short  notice,  or  at  a  time  stated, 
not  exceeding  one  year,  and  bore  a  rate  of  interest  varying  from 
2  to  6  per  cent.,  usually  less  than  4.  Such  deposits,  while  not 
unknown  in  the  national  banks,  were  exceptional  in  them  and  were 
not  encouraged,  as  they  involved  payment  of  interest,  and  the  pay- 
ment of  interest  to  ordinary  customers  was  then  considered  bad 
banking. 

The  trust  companies,  however,  solicited  these  deposits  from  that 
increasing  class  of  the  community  of  recent  growth  known  as  in- 
vestors, and  naturally,  as  their  business  to  begin  with  was  limited, 
looked  also  to  other  business  for  support  and  profit.  In  lieu  of  the 
patriotic  element  with  which  the  national  banks  were  invested,  the 
trust  company  had  received  another,  but  also  very  worthy,  charac- 
teristic. The  father  of  the  trust  company  selected  the  agency 
legally  known  as  the  fiduciary  trust  as  one  of  the  chief  elements 
of  his  creature's  composition,  and  impressed  its  sacred  name  upon 
his  child — a  most  happy  and  successful  thought.  The  administra- 
tion of  trusts  by  trust  companies  is,  in  fact,  not  essentially  different 
from,  and  no  more  important  than,  the  execution  of  ordinary 
financial  agencies  by  other  banks  throughout  the  financial  world, 
but  the  character  given  to  this  particular  class  of  agencies  by  its 
legal  derivation,  the  sanctity  with  which  it  has  been  enveloped 
by  judicial  and  legislative  action,  as  well  as  the  popular  im- 
agination, make  it  a  highly  valuable  trade-mark.  Nevertheless, 
we  all  know  that  the  agency  involved  in  making  an  ordinary  invest- 
ment for  an  inexperienced  man  or  woman  is  no  less  serious  and 
should  be  regarded  as  no  less  sacred.  The  public  appreciation  of  this 
trade-mark,  however,  in  the  case  of  the  dozen  trust  companies  re- 
ferred to,  was  sufficient  to  favor  them  with  very  considerable  patron- 
age and  to  make  several  of  them,  particularly  in  New  York  and 
Philadelphia,  leaders  in  deposit  lines,  so  that  bankers  generally 
began  to  consider  them  desirable  adjuncts  to  the  financial  scheme. 

The  trust  companies  in  question  were  all  acting  under  special 
state  charters,  much  alike  in  their  chief  features,  but  differing  in 
details.     They  were   not  all   incorporated   exclusively  for   trust   or 


TRUST  COMPANY  SECTION  467 

banking  purposes,  but  included  fidelity  and  other  insurance  and  like 
business,  not  of  the  banking  type,  in  some  instances.  In  1884, 
except  in  the  states  of  Minnesota  and  Pennsylvania,  no  general 
law  existed  in  any  of  the  United  States  under  which  the  incorpora- 
tion of  trust  companies  was  possible,  and  there  was  as  yet  but  little 
demand  for  them. 

A  suggestion  made  in  October,  1884,  by  the  writer,  to  the  presi- 
dent of  a  Chicago  bank  engaged  in  a  savings  and  commercial  busi- 
ness under  a  state  charter,  and  having  the  power  to  accept  and 
execute  trusts,  which  it  did  not  use,  resulted  in  a  conference  on  the 
subject,  in  which  it  appeared  that  the  chief  difficulty  in  the  adminis- 
tration of  trusts  lay  in  the  necessity  of  giving  a  separate  bond,  with 
sureties,  in  court,  in  each  estate.  This  requirement  was  a  great 
burden,  tedious  in  its  delays  and  multiplicity,  and  impractical  in  the 
length  of  time  the  bond  lasted,  especially  in  guardianship  cases. 
The  Illinois  constitution  forbids  special  laws,  so  it  was  suggested 
that  an  act  of  the  legislature,  general  in  its  character,  applicable 
to  all  companies  which  then  had  or  might  thereafter  have  the 
power  to  accept  and  execute  trusts,  could  remedy  this  difficulty 
by  substituting,  in  lieu  of  the  objectionable  special  bonds,  a  suffi- 
cient deposit  of  securities  with  the  state  for  the  benefit  of  all  trusts 
accepted  by  the  depositing  trust  company,  and  further  providing 
for  regulation,  examination,  and  visitation  of  the  trust  companies 
by  the  state  and  the  courts,  as  well  as  requiring  reports  by  the  trust 
companies. 

The  result  was  the  preparation  of  a  bill  for  "An  Act  to  Provide 
for  and  Regulate  the  Administration  of  Trusts  by  Trust  Com- 
panies," which  was  submitted  to  the  Legislature  of  Illinois  in 
January,  1885,  but  failed  of  enactment  in  the  long  deadlock  of  that 
year  in  the  senatorial  contest  between  General  John  A.  Logan  and 
Mr.  William  R.  Morrison.  The  bill  and  its  purposes  were  very 
thoroughly  advertised,  however,  and  attracted  widespread  attention 
throughout  the  country.  In  January,  1887,  the  bill  was  again  pre- 
sented to  the-  legislature,  and  in  June,  1887,  an  act  was  passed 
accordingly,  from  which,  however,  part  of  the  powers  desired  were 
1  lifted,  hut  in  which  the  principle  involved  was  fully  established, 
and  all  details  "f  ecurity  and  examination  were  settled.  In  1887, 
also,  New  York  passed  a  similar  general  law   for  the  establishment 


468  PRACTICAL  PRORLEMS  IN  RANKING  AND  CURRENCY 

of  trust  companies,  as  the  result  of  the  Illinois  agitation  in  1885. 
In  1889  Illinois  completed  its  law  by  amendment  granting  the 
powers  omitted  in  1887.  The  Illinois  act  has  been  in  force  ever 
since,  except  for  slight  amendments  intended  to  extend  its  benefits. 
Repeated  attacks  upon  the  act  by  designing  persons  in  the  legisla- 
ture and  the  courts  have  only  served  to  make  many  of  those  who 
first  were  honorably  opposed  to  it  in  principle  or  in  policy,  its 
warmest  defenders.     The  courts  are  its  chief  supporters. 

The  Illinois  Banking  Act  of  1889,  passed  in  connection  with 
the  second  branch  of  the  Trust  Company  Act,  enabled  all  state  banks 
to  accept  and  execute  trusts.  This  greatly  stimulated  the  business. 
From  these  beginnings  the  wave  has  spread  across  the  country, 
until  now  only  ten  states  in  the  Union  are  without  laws  to  create 
and  regulate  trust  companies,  and  the  United  States  government 
has  accepted  the  principle  involved  by  enacting  a  similar  statute 
applicable  to  the  District  of  Columbia. 

The  establishment  of  numerous  trust  companies,  which  promptly 
followed  the  enactment  of  these  laws,  the  leadership  of  Mr.  Stewart, 
of  the  United  States  Trust  Company,  in  the  refunding  and  other 
financial  operations  of  the  government  during  Mr.  Cleveland's 
second  term,  and  the  usefulness  of  the  trust  companies  and  sundry 
private  banking-houses  employing  trust-company  methods  in  these 
and  other  great  financial  operations  after  the  panic  of  1893,  soon 
evidenced  the  value  and  profitable  character  of  these  institutions 
and  rapidly  increased  the  public  appreciation. 

The  multiplication  of  trust  companies  and  their  competition 
with  private  and  national  banks,  which  necessarily  resulted,  induced 
the  early  abandonment  of  the  certificate-of-deposit  plan  as  the  sole 
method  of  receiving  funds  in  trust  companies.  Deposits  were  soon 
received  by  nearly  all  trust  companies  subject  to  check,  while 
interest  was  paid  by  them  on  daily  balances  in  the  European  fashion, 
so  that  many  national  banks  and  other  commercial  banks  have 
been  forced  to  follow  their  example  in  that  respect.  The  public 
demand  for  interest  on  deposits,  and  for  these  broader  financial 
agencies  under  state  sanction,  has  caused  the  establishment  of  many 
and  such  powerful  institutions  of  the  new  type,  until  to-day  the 
state  banks  with  trust-company  powers  have  become  at  least  equally 
important  factors  compared  with  national  banks. 


TRUST  COMPANY  SECTION  469 

In  that  connection  I  may  be  pardoned  if  I  step  aside  a  moment 
to  illustrate  by  an  anecdote  the  main  point  in  the  so-called  trust- 
company  problem.  When  I  came  to  New  York  in  1884  to  examine 
the  subject  of  trust  companies,  in  the  preparation  of  the  bill  which 
afterward  became  the  Illinois  law,  Mr.  Stewart,  the  president  of 
the  United  States  Trust  Company,  gave  me  the  most  kind  and 
useful  assistance.  In  the  course  of  my  investigation  I  questioned 
him  rather  closely  respecting  fees  and  charges  for  services  in  the 
execution  of  trusts.  After  giving  me  many  details,  he  summed 
up  the  subject  by  saying:  "Don't  bother  too  much  about  fees  and 
charges;  never  let  them  control.  Get  the  business.  What  you 
want  is  not  fees,  but  deposits." 

And  so  the  situation  is  this :  The  trust  companies  have  changed 
from  depositaries  of  funds  for  or  awaiting  investment  into  general 
banks  of  deposits  and  discount,  paying  interest  on  balances  and 
doing  all  kinds  of  financial  business.  They  are  the  keen  and  suc- 
cessful competitors,  not  only  of  the  savings  and  national  banks  on 
the  one  hand,  whose  powers  are  limited  by  law,  and  who  are  sub- 
ject to  certain  requirements  which  the  law  properly  imposes  on 
them,  but  not  on  trust  companies,  but  also,  on  the  other  hand,  of 
the  private  bankers,  against  whom  they  are  aided  by  that  legal 
characteristic,  "incorporation,"  which  the  trust  companies  possess 
and  which  is  denied  the  latter. 

It  certainly  behooves  the  national  banker,  therefore,  to  look 
about  him  to  consider  this  situation  and  map  out  a  future  course. 
The  banking  business  of  the  United  States  has  grown  in  the  last 
twenty-five  years,  not  so  that  it  disputes  with  the  older  communi- 
ties of  Europe  the  leadership  in  the  world's  finance,  as  our  news- 
papers would  have  us  believe  at  times,  but  so  that  it  is  in  the  front 
line  and  has  need  of  all  modern  machinery  in  its  institutions,  and 
the  time  has  come  for  the  expansion  of  the  powers  of  national 
banks,  unless  they  are  to  fall  behind  in  the  world's  march  of 
progress.  The  patriotic  and  commercial  values  of  these  institu- 
tions forbid  snch  a  thought,  and,  therefore,  let  us  examine  their 
needs  and  try  to  supply  them.  National  banks  now  have  power 
to  receive  all  kinds  of  deposits — commercial,  savings,  trust,  and 
public.  Their  powers  to  use  them  .'ire  limited,  they  can  only  buy 
and   sell   securities,  loan  upon  commercial  paper,   or  discount  bills 


4/0  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

of  exchange.  Short-time  or  demand  loans  upon  securities  are 
permitted  by  judicial  construction;  but  long  loans,  no  matter  how 
well  secured,  loans  upon  real  estate,  and  the  acceptance  and  execu- 
tion of  trusts,  are  denied  them.  The  present  provisions  of  the  law 
in  respect  to  their  reserves  are  intended  only  for  commercial  de- 
posits, are  unsuited  to  savings,  time,  and  other  more  or  less  perma- 
nent deposits,  and  necessarily  prevent  their  profitable  use.  The 
result  has  been  that  such  deposits  go  elsewhere,  and  the  national 
banks  are  forced,  in  seeking  the  benefit  of  such  deposits,  to  purchase 
stock  in  trust  companies,  participate  in  savings  banks,  or  by  the 
creation  of  special  trust  companies  and  savings  banks  openly  ad- 
vertised as  filial  or  allied  institutions,  to  supply  themselves  with  these 
adjuncts  to  their  business,  while  investment  and  bond  departments 
have  furnished  the  means  for  some  of  the  operations  formerly 
performed  by  private  bankers  only. 

These  devices  are  not  only  in  many  instances  inconvenient  and 
even  undignified,  but  they  have  sometimes  proved  disastrous. 
They  are  unnecessarily  expensive  as  well.  The  extra  expense 
which  results  from  this  condition  of  affairs  in  the  practical  duplica- 
tion of  officers,  clerks,  and  offices,  and  other  items,  is  so  large  and 
so  obvious  that  this  alone,  in  this  era  of  consolidation  of  business 
and  centralization  of  management,  should  be  a  strong  factor  in 
favor  of  any  change  proposed.  I  am  aware  that  in  some  instances 
a  solution  of  this  part  of  the  problem  has  been  very  practically 
attempted  by  making  the  directors  and  officers  of  the  national  bank 
also  directors  and  officers  of  its  allied  trust  and  savings  bank. 
These  and  kindred  devices  tend  to  a  disregard  of  the  law  of  the 
land,  which  cannot  be  without  detriment  to  all. 

The  situation  calls  for  prompt  and  radical  treatment,  if  grave 
results  are  to  be  averted.  The  dangerous  conditions  experienced 
in  this  and  other  large  cities  in  the  past  two  and  a  half  years  in 
banking  circles  were  very  largely  attributable  to  this  condition  of 
affairs.  It  is  possible  that  proper  regulation  of  the  investments 
and  reserves  of  state  banks  and  trust  companies  under  state  laws 
can  be  achieved,  but  in  the  conflicting  interests  involved  there  is 
little  hope  of  harmony  of  ideas  or  successful  effort  to  protect 
the  public  at  present.  The  national  banks,  now  at  a  disadvantage 
as    carefully   regulated   and   inspected   competitors,   must,    I   think, 


TRUST  COMPANY  SECTION  471 

seek  some  other  legal  remedy,   or  must  continue  to  bear   a  large 
share  of  the  burden  and  dangers  of  the  situation. 

It  is  with  great  hesitancy  that  I  suggest  at  least  a  partial  remedy 
in  the  expansion  of  the  National  Banking  Act,  so  as  to  cover  modern 
conditions.  If  it  were  so  amended  as  to  permit,  not  only  the  ac- 
ceptance of  all  kinds  of  deposits  and  banking  business,  including 
the  administration  of  trusts,  with  corresponding  power  to  make  not 
only  commercial,  but  also  time  and  real-estate  loans,  and  long  in- 
vestments of  savings  deposits — all  under  proper  regulations  and  in 
due  proportions  to  the  deposits  received;  with  such  further  regula- 
tions as  to  cash  reserves  and  reserve  agencies  as  the  different  classes 
of  deposits  suggest  and  properly  require,  much  would  be  accom- 
plished in  the  right  direction,  by  placing  the  national  banks  on  an 
equal  footing  with  the  state  banks  and  trust  companies  as  to  the 
power  to  do  business,  and  giving  the  national  banks  the  great 
advantage  of  proper  legal  restrictions  and  regulation.  The  amend- 
ment regulating  investments  and  reserves  would  be  comparatively 
simple  matters,  for  we  have  many  precedents  in  experience  and  in 
existing  laws  of  various  kinds. 

The  power  to  accept  and  execute  trusts  may  require  much  care- 
ful hedging.  It  might  be  conditioned  upon  a  compliance  with  the 
laws  on  the  subject  in  force  in  the  state  in  which  the  banks  are 
located,  or  upon  such  special  requirements  as  to  amount  of  capital 
and  the  deposit  of  security  with  the  Comptroller  as  are  now  con- 
tained in  the  act  of  Congress  authorizing  trust  companies  in  the 
District  of  Columbia.  These  and  other  details  may  be  left  to  future 
consideration. 

The  questions  of  policy  and  conflicts  of  interest  which  these 
considerations  suggest  are  necessarily  involved  in  what  is  apparent 
to  us  all,  and  must  be  met  and  solved  sooner  or  later.  It  is  not 
the  purpose  of  this  paper  to  do  more  than  call  attention  to  them. 
This  organization  should  be  the  leader  in  meeting  this  situation, 
and  in  organizing  a  patient,  careful,  and  scientific  investigation  of 
the  subject,  which  will  go  far  to  produce  a  proper  remedy. 


472    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 
TRUST  COMPANY  FAILURES 

ADDRESS  DELIVERED  BY  A.  A.  JACKSON,  VICE-PRESIDENT  OF  THE  GIRARD  TRUST 
COMPANY  OF  PHILADELPHIA,  BEFORE  THE  AMERICAN  BANKERS'  ASSOCIATION, 
AT   NEW    YORK   CITY,   SEPTEMBER,    IOO4. 

The  fact  that  there  is  no  central  bureau  for  the  filing  of  statistics 
relating  to  trust  companies,  such  as  exists  for  national  banks,  which 
are  under  federal  control  and  subject  to  the  duty  of  making  periodi- 
cal reports  to  the  government  at  Washington,  renders  it  a  matter 
of  some  difficulty  to  obtain  reliable  data  as  to  trust  companies 
throughout  the  United  States.  This  is  perhaps  the  more  apparent 
in  connection  with  any  search  for  data  relating  to  failures  among 
these  institutions,  for  while  due  diligence  will  collect  a  mass  of 
figures  relating  to  live  corporations,  those  of  companies  that  have 
suffered  insolvency  and  passed  their  present  activity  are  to  be  gained 
in  many  instances  only  from  persons  who  were  identified  with  them 
in  their  management  or  liquidation.  It  is  only  within  compara- 
tively recent  years,  as  the  assets  of  the  class  of  corporations  that  we 
represent  have  assumed  steadily  increasing  proportions  of  great 
magnitude,  that  the  legislatures  of  the  various  states  now  having 
banking  departments  have  enacted  laws  providing  for  officials 
whose  duty  it  is  to  examine  periodically  the  condition  of  trust  com- 
panies to  ascertain  that  they  are  being  managed  in  accordance  with 
the  existing  statutes.  Even  now  some  states  have  no  such  pro- 
visions, and  although  for  the  purposes  of  preparing  some  figures 
for  your  consideration  I  have  approached  the  executives  of  all  the 
states  in  the  Union,  this  fact  has  somewhat  handicapped  me  and 
rendered  it  necessary  that  for  the  purposes  of  making  the  data  as 
complete  as  possible  I  should  in  some  instances  have  recourse  to 
unofficial  figures  for  my  calculations.  Indeed  I  think  that  I  have 
trespassed  somewhat  upon  the  good  nature  of  my  correspondents 
in  this  matter,  but  their  uniform  courtesy  has  possessed  me  of  de- 
tails of  a  scope  beyond  which  I  could  not  well  go  without  becom- 
ing a  nuisance  to  those  to  whom  I  have  necessarily  applied  for 
information. 

Trust  companies  of  course  had  their  birth  in  the  older  states, 
New  York  granting  the  first  charter  to  the  Farmers  Loan  and 
Trust  Company,  then  known  as  the  Farmers  Fire  Insurance  Com- 
pany, in  the  year  1822,  and  in  1830  to  the  New  York  Life  Insu- 


TRUST  COMPANY  SECTION  473 

ranee  and  Trust  Company ;  while  Pennsylvania  in  February  of 
1836  granted  to  the  Pennsylvania  Company  for  Insurances  on  Lives 
and  Granting  Annuities  the  powers  to  transact  a  trust  business,  it 
having  formerly  from  its  charter  in  1812  transacted  solely  the  busi- 
ness indicated  by  its  title.  In  the  next  month  of  the  same  year,  that 
is  in  March  of  1836,  the  present  Girard  Trust  Company  was 
chartered  under  its  then  name  of  the  Girard  Life  Insurance,  An- 
nuity and  Trust  Company  of  Philadelphia.  These  two  states  of 
New  York  and  Pennsylvania  practically  monopolized  the  creation 
of  trust  companies  until  after  the  Civil  War. 

It  may  be  proper  before  giving  general  figures  to  consider  what 
failures  have  occurred  in  these  states  just  mentioned,  which  have 
over  sixty  per  cent,  of  the  aggregate  resources  of  the  trust  com- 
panies of  the  country,  New  York  with  $1,200,000,000  and  Penn- 
sylvania with  $1,069,000,000. 

The  banking  department  of  the  state  of  New  York  was  estab- 
lished in  the  year  1851,  and  in  1874  trust  companies  were  placed 
generally  under  the  supervision  of  the  superintendent  of  banks. 
Mr.  Kilburn,  the  present  incumbent  of  this  office,  has  very  kindly 
provided  me  with  figures  showing  that  from  the  date  of  this  super- 
vision in  1874  to  December  31,  1903,  seventy-five  trust  companies 
have  been  incorporated,  of  which  only  two  have  failed:  one  in  1877 
as  a  result  of  fraudulent  management,  and  one  in  1891  because  of 
imprudent  conduct  by  its  officers.  In  each  case  the  capital  involved 
was  one  million  dollars.  These  figures  with  which  I  am  provided 
do  not  include  those  of  companies  that  may  have  been  temporarily 
in  trouble,  nor  the  unfortunate  necessary  reorganization  under  a 
new  name  of  a  company  in  the  city  whose  short  life  was  apparently 
devoted  by  its  officers  to  the  one  end  of  floating  securities  in  a 
manner  that  betrayed  a  lamentable  lack  of  conservatism. 

It  would  seem,  therefore,  that  in  the  last  fifteen  years  no  com- 
pany in  the  state  of  New  York  has  actually  failed  to  the  extent  of 
not  being  able  to  resume  business,  and  although  the  company  to 
whose  failure  I  have  referred  as  occurring  in  1877  was  a  debtor 
to  the  total  of  seven  per  cent,  of  the  aggregate  assets  of  trust 
companies  within  the  state  of  New  York,  wc  must  remember  that 
at  that  time,  so  closely  following  the  depression  of  the  panic  of 
1873,  New  York  was  possessed  of  very  few  trust  companies,  and  a 


474  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

failure  of  the  size  of  the  corporation  which  then  became  insolvent 
would  naturally  show  a  large  percentage  of  the  total  assets  then 
employed  within  the  state.  On  the  other  hand,  by  the  year  1891, 
when  the  second  failure  took  place,  the  total  assets  of  trust  com- 
panies in  the  state  had  increased  five  and  one-half  times  over  the 
figure  at  which  they  were  in  1877,  and  although  the  total  liabilities 
of  the  insolvent  company  of  the  later  year  were  $3,947,000,  they 
form  only  }4  of  10  per  cent,  of  the  total  assets  of  trust  companies 
in  the  state.  Since  that  time,  too — that  is,  in  the  last  fifteen  years 
— the  aggregate  assets  of  trust  companies  have  increased  above 
four  and  one-quarter  times  over  the  large  totals  of  that  day. 

In  Pennsylvania  the  banking  department  of  the  state  was  by 
law  given  supervision  over  trust  companies  in  1892.  The  records 
of  this  department  show  that  there  were  deserved  the  laudatory 
phrases  contained  in  the  first  report  of  the  superintendent  of  bank- 
ing upon  the  excellent  condition  in  which  he  found  the  companies 
of  the  state.  In  1892  a  small  concern  that  bore  the  word  "trust" 
in  its  title,  but  was  in  reality  transacting  none  of  the  business  for 
which  a  trust  company  is  properly  organized,  failed  for  a  compara- 
tively small  sum.  In  1895  another  company  with  total  liabilities 
of  $105,000  made  an  assignment,  the  failure  being  2-100  of  1  per 
cent,  of  the  total  assets  in  the  banking  and  trust  department  of  the 
Pennsylvania  companies  in  that  year.  In  1896  a  company  that 
dealt  almost  exclusively  in  western  mortgages  assigned  with  total 
liabilities  of  $1,420,000,  or  about  2-10  of  I  per  cent,  of  the  aggre- 
gate assets  of  the  companies  of  the  state.  In  1897  a  receiver  was 
appointed  for  another  trust  company  which  transacted  materially 
the  same  kind  of  business,  and  found  that  its  investments  had  so 
suffered  by  the  bad  years  for  farm  lands  in  the  West  as  to  make 
it  impossible  for  it  to  continue  business.  The  failure  of  this  com- 
pany was  also  to  an  extent  of  only  2-10  of  1  per  cent,  of  the  aggre- 
gate resources  of  the  companies  in  the  state.  In  1898  a  trust  com- 
pany which  was  closely  affiliated  with  a  national  bank  for  which  a 
receiver  had  just  been  appointed,  and  to  the  president  of  which  it 
had  imprudently  loaned  money,  found  it  necessary  to  make  an 
assignment.  This  failure  was  a  startling  evidence  of  the  evils  of 
using  one  borrower  as  an  outlet  for  money,  and  of  the  domination 
of  one  man  or  set  of  men  in  the  directorate,  while  the  other  mem- 


TRUST  COMPANY  SECTION  475 

bers  of  the  board  were  content  to  let  the  company  be  managed  with- 
out de\oting  to  its  affairs  the  scrutiny  that  they  should  be  bound 
give.  It  is,  however,  a  gratification  to  know  that  although  this 
company  failed  for  over  $2,000,000,  it  finally  paid  its  creditors  and 
stockholders  in  full.  In  1901  a  company  that  had  not  been  formerly 
under  the  examination  of  the  state  department  was  placed  in  the 
hands  of  a  receiver.  Its  total  liabilities  I  do  not  know,  but  they 
were  not  of  great  aggregate. 

There  are  no  other  failures  of  which  I  have  knowledge 
within  the  state  of  Pennsylvania  in  the  years  during  which  the 
banking  department  has  been  in  existence,  save  that  of  a  very  small 
company  rejoicing  in  an  illustrious  and  imposing  name,  and  de- 
veloping liabilities  of  $13,000;  and  another  company,  Pensylvanian 
in  incorporation,  but  transacting  no  business  other  that  that  of 
having  in  its  annual  meetings  within  the  borders  of  the  state,  its  deal- 
ings being  entirely  in  western  mortgages. 

From  the  foregoing  it  is  gratifying  to  note  that,  taking  as  ex- 
amples the  two  states  which  by  their  customs  are  perhaps  more 
definitely  engaged  in  what  is  the  established  practice  of  a  trust 
company  business,  the  ratio  of  failures  to  general  assets  has  in  no 
case  amounted  in  New  York  within  the  last  twenty-five  years  to 
more  than  one  and  four-tenths  per  cent.,  and  in  Pennsylvania  in  the 
last  fifteen  years  to  more  than  two-tenths  of  one  per  cent.  I  under- 
stand that  in  every  instance  the  moneys  and  securities  held  by  these 
corporations  in  fiduciary  capacities,  or,  in  other  words,  trust  funds 
in  the  more  literal  acceptation  of  the  term,  were  unimpaired  by 
the  difficulties  experienced  by  the  companies  themselves.  I  may 
say  that  under  the  Pennsylvania  statute  and  the  laws  of  many  of  the 
eastern  states,  it  is  provided  that  trust  funds  shall  be  kept  separate 
and  apart  from  other  assets  of  the  company  holding  them. 

Taking  up  now  the  broader  field  of  trust  companies  throughout 
the  country,  I  have  arrived  at  the  following  results  of  my  investiga- 
tions : 

In  the  New  England  states,  the  figures  being  official  for  all  save 
Maine  and  Vermont,  one  company  failed  in  [891,  three  companies  in 
1893,  one  in  [896,  one  in  1897,  and  one  in  1904.  Those  of  1896 
and  1904  paid  in  full  and  resumed,  and  the  others  have  paid  their 
■reditors  from  38  per  cent,  to  55  per  cent.     The  aggregate  of  all 


476  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

three  is  less  than  /.  of  I  per  cent,  of  the  present  assets  of  the 
companies  in  these  states.  As  I  am  not  provided  with  the  assets 
of  the  companies  in  the  several  years  in  which  occurred  the  failures, 
I  cannot  give  the  smaller  percentage  applicahle  to  those  years. 

In  the  eastern  states  I  have  already  read  figures  concerning 
New  York  and  Pennsylvania.  In  New  Jersey  a  company  failed 
in  1890  with  liabilities  bearing  a  ratio  of  1-10  of  10  per  cent,  to 
the  total  assets  of  the  companies  in  the  state  in  that  year ;  and  a 
company  failed  in  1903,  whose  nominal  liabilities  amounted  to  2-6 
of  10  per  cent,  of  the  total  assets  of  that  year,  but  this  was  a  cor- 
poration that  had  a  life  of  but  a  few  months  before  it  was  convicted 
of  practices  at  variance  with  reputable  trust  company  methods,  and 
its  charter  was  surrendered.  In  Delaware  likewise  a  failure  oc- 
curred in  1903  of  a  company  holding  a  charter  under  the  laws  of 
that  state,  but  which  was  virtually  a  Mexican  corporation  with 
branches  in  different  parts  of  the  United  States,  and  engaged  in 
business  which  was  foreign  to  a  trust  company  in  our  acceptance 
of  the  term.  We  remember  very  well  the  failures  of  last  year  in 
Baltimore  of  two  companies,  and  a  third  which  was  a  branch  of  the 
Delaware  corporation  of  which  I  have  just  spoken;  and  if  we 
place  the  liabilities  of  these  companies  against  the  total  assets  in 
the  state  of  Maryland  we  shall  find  that  they  amount  to  20  per  cent, 
of  them.  Investments  of  large  sums  in  one  asset  was  the  primary 
cause  of  these  failures,  but  one  of  the  companies  came  out  of  the 
hands  of  its  receiver  and  resumed  operations  a  little  over  two 
months  after  its  suspension  with  capital  unimpaired,  and  the  other 
a  larger  corporation,  has  disposed  of  the  interest  which  had 
carried  it  to  the  wall,  and  I  understand  that  there  is  every  likeli- 
hood of  a  settlement  in  full  with  its  depositors  and  creditors. 

Even  aggregating  all  failures  in  the  eastern  states  within  the 
lives  of  the  several  banking  departments,  the  total  liabilities  form 
but  one  per  cent,  of  the  present  assets  within  these  states. 

Of  the  southern  states,  Virginia,  West  Virginia,  Mississippi, 
and  Louisiana  are  the  only  ones  furnishing  me  with  official  figures ; 
in  fact  Georgia,  Mississippi,  and  Tennessee  have  no  banking  de- 
partments with  supervision  over  trust  companies.  From  none  of 
these  states,  however,  am  I  advised  that  there  have  been  any  failures, 


TRUST  COMPANY  SECTION 


477 


and  the  companies  within  their  borders  have  between  them  assets 
of  about  $82,000,000. 

From  the  state  departments  of  the  middle  states  I  have  received 
official  figures  from  all  but  Ohio,  Wisconsin,  and  Iowa.  No 
failures  are  shown  except  one  of  this  year  in  Indiana,  where 
the  company  has  paid  its  creditors  in  full ;  and  one  in  Minnesota  in 
1903,  with  liabilities  of  $412,000,  forming  less  than  one-tenth  of 
one  per  cent,  of  the  assets  of  the  middle  states. 

The  western  states,  because  of  the  absence  of  laws  govern- 
ing trust  companies,  or  the  recent  enactment  of  them,  have  been 
rather  barren  as  to  figures  in  connection  with  my  investigations. 
North  Dakota,  Kansas,  Wyoming,  and  New  Mexico  report  no 
failures,  and  I  am  not  advised  of  any  in  the  other  states. 

The  Pacific  states  also,  either  by  reason  of  lack  of  records  in 
their  governments  or  for  other  causes,  have  not  furnished  informa- 
tion as  to  any  failures,  and  I  am  happy  to  say  that  I  know  of  none. 

The  data  at  my  command  do  not  include  the  total  assets  of  trust 
companies  in  the  United  States  for  the  several  years  prior  to  1903, 
but  basing  a  calculation  upon  the  figures  of  1893  and  averaging 
the  growth  of  companies  during  the  succeeding  ten  years,  it  would 
seem  that  the  average  ratio  of  the  liabilities  of  failed  companies 
throughout  the  country  to  the  total  average  assets  of  all  the  com- 
panies has  been  approximately  9-100  of  1  per  cent. 

It  is  rather  interesting  to  note  that  while  one  thousand  trust 
companies  in  the  United  States  have  aggregate  resources  of  $3,600,- 
000,000,  and  the  above  result  is  obtained  as  to  failures,  the  average 
ratio  of  liabilities  of  failed  national  banks  to  the  total  assets  of  na- 
tional banks  in  the  country  during  the  same  period — the  last  ten 
years — has  been  28-100  of  1  per  cent.  From  the  last  of  the  reports 
of  the  Comptroller  of  the  Currency,  from  which  I  have  compiled 
this  result,  I  find  that  there  are  five  thousand  and  forty-two  na- 
tional banks  with  total  resources  of  $6,300,000,000,  or  more  than 
five  times  the  number  of  trust  companies  with  less  than  double 
the  assets. 

Failures  among  us,  therefore,  seem  to  be  reduced  to  a  minimum. 
They  would  seem  to  have  been  brought  about  by  imprudent  manage- 
ment, depreciation  of  securities,  and  excessive  loans  to  clients; 
while   in  only  one   instance  has  there  been   assigned  as  a  cause  of 


478  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

insolvency  the  defalcation  of  an  officer.  The  thing-,  therefore,  that 
would  be  most  hard  to  guard  against  is  palpably  absent  from  the 
list  of  misfortunes,  and  this  is  a  tribute  to  the  class  of  men  that 
guide  our  companies.  That  the  people  realize  their  solidity  is 
shown  by  the  enormous  bulk  of  their  deposits,  and  that  they  are 
profitably  managed  for  their  stockholders  is  evidenced  by  the  fact 
that  from  the  compilation  I  have  made  of  the  dividends  paid  by 
six  hundred  and  two  companies  that  have  been  in  existence  for  over 
two  years,  it  would  seem  that  their  stockholders  receive  an  average 
rate  of  9.4  of  10  per  cent,  upon  par  of  their  shares.  This  exceeds 
the  rate  of  8.7  of  10  per  cent,  which  is  given  in  the  Comptroller  of 
the  currency's  report  as  the  return  to  stockholders  of  National 
banks  in  the  country. 


THE  BUSINESS  IN  FOREIGN  COUNTRIES  ANALOGOUS 
TO  THAT  OF  TRUST  COMPANIES  IN  THE  UNITED 

STATES 

ADDRESS  DELIVERED  BY  HON.  CHARLES  FRANCIS  PHILLIPS,  PRESIDENT  OF  THE  COR- 
PORATION TRUST  COMPANY  OF  DELAWARE,  NEW  YORK,  BEFORE  THE  AMERICAN 
BANKERS'   ASSOCIATION,   AT    MILWAUKEE,  OCTOBER,    19OI. 

The  subject  upon  which  I  am  asked  to  speak  is  one  abounding 
in  interest,  and  concerning  which  a  great  deal  may  be  said  that  is 
eminently  suggestive  and  practically  useful ;  but  it  cannot  be  treated 
in  precisely  the  way  in  which  a  casual  observation  of  its  title  in  the 
program  would  lead  one  to  expect. 

As  a  matter  of  fact,  and  in  the  strict  sense  of  the  term,  there 
are  no  trust  companies  in  Europe  or  the  Orient,  and  none  in  the 
Latin-American  countries,  barring  the  Mexican  Trust  Company, 
a  purely  American  foundation,  and  one  or  two  others,  all  in  a 
nascent  state ;  nor,  so  far  as  I  am  aware,  have  corporations,  any 
where  outside  of  the  United  States  and  some  portions  of  Canada,  yet 
undertaken  to  do,  in  a  conjoint  and  aggregate  form,  any  substantial 
portion  of  the  work  which  is  customarily  and  regularly  performed 
by  trust  companies  among  us.  Indeed,  the  ideas  underlying 
corporate  fiduciaryship  are  the  product  of  our  special  development, 
at  once  vigorous,  rapid  and  intelligent,  in  the  realms  of  industry, 


TRUST  COMPANY  SECTION  479 

commerce,  and  finance;  though  the  source  whence  these  ideas 
have  drawn  their  inspiration  may  be  easily  discovered,  not  only  in 
the  teaching,  but  also  in  the  practice,  of  the  financiers  of  the  Latin 
race,  to  whose  superb  gift  of  analysis  and  co-ordination,  and  to 
whose  profound  knowledge  of  basic  principles,  the  modern  business 
world  of  both  hemispheres  is  indebted  for  its  best  theories  and  its 
most  successful  methods  of  exploitation  and  management. 

But,  if  actual  conditions  make  it  impossible  to  institute  direct 
comparisons,  it  is  easy,  and  let  us  hope  that  it  may  be  somewhat 
profitable,  to  observe  in  what  way  the  functions  analogous  to  those 
of  American  trust  companies  are  performed  in  the  older  world. 

And  here,  on  the  very  threshold  of  our  subject,  it  becomes 
necessary  to  remark  that  long  centuries  of  sincere  and  enthusiastic 
devotion  to  the  principle  of  concentrated,  as  opposed  to  divided  or 
collective,  authority,  and  the  sentiment,  sustained  as  well  by  habit 
as  by  tradition,  of  respect  for  personal  prominence  and  ability  and 
of  confidence  in  the  leadership  of  the  specially  trained  and  experi- 
enced few,  have  operated,  in  substantially  every  part  of  Europe, 
to  cast  upon  chosen  individuals  those  duties  and  responsibilities 
which,  more  and  more  each  day,  become,  within  our  own  confines, 
the  prerogative  of  associated  effort  and  of  combined  obligation.  Even 
in  England,  which  has  given  us,  along  with  our  language,  so  large 
a  part  of  our  laws  and  customs  and  so  many  of  the  components 
of  our  national  character,  the  individual  trustee  is  in  such  esteem 
as  to  make  the  success  of  corporate  trusteeship  on  a  very  large  scale, 
at  least  for  the  immediate  present,  extremely  doubtful.  You  all 
remember,  I  fancy,  the  effort  made  by  J.  Spencer  Balfour,  about 
the  year  1885,  to  turn  to  account  through  the  Trustees,  Executors 
and  Securities  Company,  the  idea  which  finds  so  ample  and  so 
profitable  an  expression  in  many  of  the  financial  institutions  of  our 
great  cities;  and,  doubtless,  you  remember  quite  as  well  the  absolute 
failure  of  that  company  to  realize  its  purpose,  outside  the  field  of 
simple  promotion.  For  a  while  it  promised  exceedingly  much 
under  the  auspices  of  those  who  had  created  it,  and  its  founders' 
shares,  whose  par  value  was  only  ten  pounds,  were  sold,  when  they 
could  be  bought  at  all,  for  the  enormous  sum  n(  eight  thousand 
pounds;  hut  lack  of  achievement,  enforced  modification  of  plan, 
and  complete  reorganization  followed  only  too  soon. 


48o  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

In  England,  and,  generally  speaking,  throughout  British  terri- 
tory, great  enterprises  are  sustained  far  more  largely  than  here 
by  credit,  independently  of  direct  security ;  and  in  all  those  sections 
of  the  world  the  moral  risk  of  an  undertaking,  which  has  always 
to  do  with  its  promoters  and  managers,  and  the  inherent  merit  of  the 
scheme  itself,  as  a  basis  of  development  or  improvement,  are  more 
closely  scanned  and  more  seriously  weighed  than  the  possible  lien 
of  the  values  emitted.  Hence,  English  railroad  and  other  in- 
dustrial mortgages,  which,  if  they  were  very  numerous,  would 
suggest  the  formation  of  trust  companies  on  the  American  plan,  are 
scarce  commodities  in  the  market ;  various  sorts  of  debentures  and 
preference  shares  taking  their  place,  in  obedience  to  the  instinctive 
belief  of  the  business  community  that  personal  worth  and  responsi- 
bility, coupled  with  thorough  knowledge  and  wide  experience,  are, 
as  elements  of  protection,  superior  to  material  and  legal  guarantees 
in  the  shape  of  fixed  encumbrances.  It  may  therefore  be  said  that 
the  trust  companies  of  the  British  Empire  are,  in  effect,  its  men  of 
character,  skill  and  wealth,  whose  names  mean  more  to  the  invest- 
ing public  than  liens  of  any  sort.  Much  fiduciary  work  of  a  quali- 
fied character  is,  of  course,  done  by  the  banks ;  but  it  is  done  as  an 
incident  to  their  general  business,  and  not  as  a  specific  undertaking. 

In  judging  the  situation  as  it  stands  in  relation  to  our  Anglo- 
Saxon  brethren,  we  must,  however,  remember  that  England,  which 
is  the  soul  of  British  finance  all  over  the  globe,  is  an  ancient,  a 
small,  and  a  homogeneous  country,  with  traditions  that  are,  in  many 
respects,  more  powerful  than  laws,  and  which  has  not  to  face, 
as  this  country  has,  the  problems  arising  from  the  absorption  of 
foreign  peoples,  the  rapid  increase  of  population,  the  restless  as- 
pirations of  the  multitude,  the  ceaseless  development  of  a  practically 
unlimited  home  territory,  the  incessant  creation  of  new  enterprises, 
and  the  important  political  isues  which  are  inseparable  from  the 
freshly  assumed  responsibilities  of  a  world  power.  Hence,  although 
everywhere  and  always  it  is  the  individual  mind,  moved  by  provi- 
dential vocation,  that  guides  human  destinies,  whether  they  be 
material  or  moral,  and  however  they  may  be  influenced  by  what 
we  call  general  conditions,  it  is  nevertheless  true  that  in  this  country, 
largely  dominated  as  it  is  by  the  direct  action  of  the  masses,  the 
aggregate  man  and  the  aggregate  form  of  effort  have  a  prominence 


TRUST  COMPANY  SECTION  48i 

which  they  nowhere  else  enjoy,  whether  in  the  domain  of  govern- 
ment or  in  that  of  economics.  Other  countries  may,  sooner  or  later, 
find  it  advantageous  to  imitate  many  of  our  institutions,  and  our 
trust  companies  among  the  rest;  but  the  trust  company  as  we 
know  it  here  is  likely  to  remain  for  a  long  while  a  distinctively 
American  form  of  business  facility. 

It  is  true  that  a  few  of  our  greatest  trust  companies,  as,  for  ex- 
ample, the  Guarantee  Trust  Company  of  New  York,  have  estab- 
lished branches  in  London  and  some  other  foreign  cities;  but  the 
officers  of  these  institutions  assure  me  that  the  operations  of  their 
branches  are,  from  necessity,  confined  mainly  to  the  issue  of  letters 
of  credit  and  to  the  purchase  and  sale  of  exchange  and  of  current 
securities  designed  for  investment.  These  transplanted  financial 
models  may,  however,  serve  as  educational  factors,  and  so,  in  the 
long  run,  do  a  work  for  which  they  were  not  specifically  or  even 
consciously  established.  They  have,  in  fact,  helped  to  stimulate 
the  creation,  on  a  considerable  scale,  of  safe  deposit  vaults  and  like 
conveniences ;  though  they  have  failed  thus  far  to  give  any  notice- 
able impulse  to  the  extension  of  fiduciary  work  through  corporate 
mediumship. 

As  to  the  provision  so  necessary  to  be  made,  in  an  active  com- 
munity, for  the  care  of  long-time  deposits,  both  the  English  and 
continental  banks  and  similar  institutions  have,  from  time  im- 
memorial, done  more  than  has  ever  been  undertaken  by  either  banks 
or  trust  companies  in  America,  and  have  done  it  more  broadly,  more 
efficiently,  more  cheaply  and  more  satisfactorily,  thus  furnishing  us 
with  precedents  eminently  worthy  of  respectful  study. 

In  Germany,  Austria,  and  some  other  parts  of  continental 
Europe  there  exist,  in  great  numbers,  what  are  called  mortgage 
banks,  institutions  created  to  aid  agriculture,  which  must  always 
need  considerable  funds  for  uncertain  periods,  and  to  promote  the 
interests  of  rural  and  urban  land  owners,  large  and  small;  and  these 
banks,  which  subsist  on  their  own  capital  and  on  deposits  received 
under  special  conditions  and  paying  a  fair  return,  undertake,  to  a 
certain  extent,  some  classes  of  work  which  are  commonly  assumed 
by  trust  companies  here,  such  as  the  receipt,  exchange,  and  distribu- 
tion of  securities  in  cases  of  organization,  reorganization,  and  con- 
solidation; but  their  fiduciary  activities  are  neither  numerous  nor  of 
3i 


482  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

broad  application.  It  is  in  France  that  we  find  more  fully  developed 
than  anywhere  else  the  idea  of  such  intervention  as  here  constitutes 
the  most  beneficent  function  of  trust  companies  and  kindred  institu- 
tions ;  and,  since  the  time  allotted  to  this  paper  is  necessarily  very 
restricted,  I  shall  ask  you  to  permit  me  to  confine  myself  almost 
entirely  to  a  view  of  what  French  finance  'has  achieved  in  the  field 
which  it  is  my  present  duty  to  explore  hastily ;  it  being  premised 
that  trusts  arising  out  of  the  private  relations  of  life,  such  as  those 
of  executor,  administrator,  guaridian,  committee  in  lunacy,  and 
the  like,  are,  in  France  and  in  other  parts  of  continental  Europe, 
even  more  than  in  Great  Britain,  relegated  to  the  individual,  and 
exercised  by  a  limited  class  of  persons,  whose  ability,  knowledge, 
experience  and  probity  mark  them  as  pre-eminently  qualified  for 
tasks  where  delicate  and  sympathetic  appreciation  are  often  as  es- 
sential to  ultimate  and  thorough  success  as  are  business  tact,  efficient 
watchfulness,  and   careful  legal   procedure. 

The  role  assigned  in  France,  and  in  some  other  countries,  to 
boards  of  trade,  chambers  of  commerce,  and  other  commercial  and 
quasi  governmental  bodies,  often  renders  not  only  inexpedient  or 
unnecessary,  but  even  impossible,  certain  trusts,  which,  among  us, 
constantly  arise  from  the  exigencies  of  ordinary  business,  such  as 
those  relating  to  bankruptcy,  receiverships  and  liquidations ;  and 
so  it  happens  that  what  we  have  mainly  to  consider  in  the  present 
case  are  those  trusts,  direct  or  implied,  which  spring  from  economic 
development,  the  alternate  concentration  and  distribution  of  capital, 
and,  in  a  particular  sense,  the  regulation  of  credit,  a  thing  even  more 
vital  in  old  than  in  new  countries,  in  dense  and  highly  organized 
communities  than  in  those  of  relatively  scant  population  and  less 
complicated  formation.  And  here  it  becomes  imperative  to  remark 
that  our  own  country,  so  justly  esteemed  the  model  of  liberal  and 
progressive  government,  the  home  of  general  and  unstinted  oppor- 
tunity, and  the  friend  of  broad  and  vigorous  initiative,  has  proved 
itself  to  be,  in  respect  to  the  common  financial  needs  of  all  who 
must  work  for  a  livelihood  with  either  head  or  hands,  the  least 
democratic  of  the  great  civilized  powers.  To  so  large  an  extent 
is  this  true  that  one  may  safely  assert  that  what  is  somewhat  difficult 
of  attainment  here  by  men  of  tolerable  substance  is,  in  France, 
within  the  easy  and  constant  reach   of  the  most   insignificant  of 


TRUST  COMPANY  SECTION  483 

toilers.  Let  an  ordinary  workman  apply  to  one  of  our  large  trust 
companies  for  a  mortgage  loan  of  three  or  four  hundred  dollars 
on  his  modest  tenement,  or  let  a  petty  tradesman  seek  to  secure 
from  it  in  permanency  such  accommodations  as  will  enable  him 
fully  to  develop  his  humble  enterprise,  and  the  truth  of  my  statement 
will  be  quickly  confirmed.  The  fact  is  that  the  whole  machinery 
of  higher  finance  in  France,  as  represented  by  public  institutions, 
forms  a  single  trust  company  of  unbounded  responsibility,  acting, 
in  many  respects,  gratuitously  for  its  beneficiaries,  imprinting 
with  its  moral  guarantee  the  bulk  of  all  the  securities  which  con- 
stitute the  savings  of  the  people  and  the  reserve  power  of  the  nation, 
and,  by  its  highly  ramified  operations  and  by  the  facilities  and  im- 
munities which  flow  from  them,  making  useless  many  of  the  forms 
of  procedure  which  give  rise  to  the  work  and  assure  the  profits  of 
the  enterprising  trust  companies  which  are  to  be  found  in  every 
quarter  of  our  own  land.  This  will  scarcely  be  believed  without 
illustration ;  but  illustration  is  more  than  easy,  and  it  is  likely  to  be 
instructive. 

One  of  the  most  conspicuous  functions  of  our  trust  companies, 
apart  from  such  as  are  technically  fiduciary,  is  to  gather  together, 
whether  through  interest-bearing  accounts,  certificates  of  deposits, 
debentures,  or  otherwise,  the  long  time   funds  of  the  community, 
and  those  which   are  not   regularly  needed  in  the  quick  turn-over 
of  daily  commerce,  and  to  lend  them,  on  the  pledge  of  securities, 
on  mortgage,  or  in  some  equally  safe  manner,  to  those  who  require 
cash  for  legitimate  speculation,  or  who,  in  construction  or  develop- 
ment, or  with  a  view  to  family  settlements,  must  expend  an  amount 
of   money    which    cannot   be    prudently   withdrawn    from    business 
operations  or  obtained,  without  inconvenience  or  disadvantage,  from 
the  outright  sale  of  real  property  or  of  special  investments.     This 
function  is  certainly  a  most  useful  one,  and  in  the  performance  of 
it  an  immense  volume  of  funds  is  wisely  and  beneficently  employed ; 
but  whether  the  trust  company  discharging  it  be  a  small  one,  with 
two  or  three  millions  at  its  service,  or  a  large  one,  commanding  fifty 
or  a  hundred  millions,  or  even  more,  the  policy  pursued  is,  with 
slight  exceptions,  always  the  same.     Money  is  taken   and  lent   in 
blocks  of  thousands;    and   the  larger  the  blocks,  consistently  with 
the  circumstances  of  the  case  and  the  prudent  conduct  of  affairs, 


484    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

the  more  completely  the  management  is  satisfied.  Depositors  and 
borrowers  who  deal  in  petty  sums  are  respectfully  referred  to  the 

savings  hanks  and  the  building  societies,  admirable  institutions  in 
their  way,  but  frequently  cumbersome,  and,  in  the  scientific  sense, 
always  far  from  economical.  But  this  is  not  the  case  in  France, 
and  there,  as  the  result  of  a  more  direct  and  democratic  policy,  the 
corporations  most  analogous  to  our  trust  companies,  such  as  the 
Societe  Generate,  the  Credit  Lyonnais  and  the  Credit  Foncier,  have 
obtained  proportions  so  large  as  to  make  even  the  most  prosperous 
of  our  trust  companies,  and  of  our  banks  as  well,  seem  very  small 
indeed. 

Let  us  examine  for  a  moment  the  methods  of  the  Credit  Foncier, 
an  institution  eminently  typical,  which,  alike  in  good  times  or  bad, 
can  easily  furnish  a  hundred  millions  of  dollars,  at  substantially  a 
moment's  notice,  to  any  enterprise  or  series  of  enterprises  deserv- 
ing it,  and  whose  mortgage  loans  amount  to  probably  not  less  than 
five  or  six  hundred  millions  of  dollars,  scattered  all  over  France, 
in  sums  varying  from  a  few  hundred  to  several  millions  of  francs. 
This  institution  has,  of  course,  a  very  large  capital,  but  one  wholly 
inadequate  to  its  immense  operations.  It  has,  however,  so  thor- 
oughly proven  its  devotion  to  the  common  good  by  aiding  the  com- 
munity in  detail  and  the  public  as  a  body,  and  by  offering,  year  in 
and  year  out,  to  even  the  humblest  dealer  the  most  favorable  rate 
for  his  little  deposit  and  the  readiest  succor  in  his  small  wants,  that, 
when  it  needs  money,  as  it  often  does,  it  can  obtain  it  in  unlimited 
supply  by  the  mere  issue  of  its  long  time  debentures  on  no  other 
security  than  its  own  reputation,  and  thus  stand  prepared  to  ad- 
vance the  funds  which  build  up  enterprises  that  must  be  slowly 
developed,  or  to  respond  to  the  never  ceasing  demands  of  the  great 
army  of  workers  whose  systematic  industry  and  thrift,  thus  supplied 
with  capital,  have  made  France,  in  a  broad  sense,  and  in  proportion 
to  its  population,  the  richest  country  in  the  world,  in  spite  of  wars, 
a  vast  standing  army,  heavy  taxes  and  occasional  commercial 
catastrophes  like  that  of  the  Panama  Canal. 

The  securities  which  come  to  this  institution  in  virtue  of  its 
co-operation  in  the  upbuilding  of  prosperity,  and  which  are,  no 
matter  what  may  be  the  prevailing  conditions,  scrutinized  by  it  as 
carefully  as  the  collateral  of  a  time  loan  would  be  scrutinized  by 


TRUST  COMPANY  SECTION  485 

us  at  a  critical  juncture,  it  sells  to  the  great  public,  who,  relying 
on  its  moral  guarantee,  not  only  buys  in  a  single  day  the  whole  of 
each  issue,  but  in  the  majority  of  cases  tenders  impatiently  from 
five  to  twenty  times  the  amount  of  the  emission.  Whoever,  during  a 
visit  to  Paris,  has  chanced  to  enter  the  Rue  des  Capucines,  on  an 
offering  day  of  the  Credit  Foncier,  will  recall  very  vividly  the  im- 
pression made  upon  him  by  an  orderly  crowd  of  ten  or  fifteen 
thousand  men  and  women,  of  almost  every  class  and  condition, 
calmly  waiting,  hour  after  hour,  in  the  hope  of  getting  a  small  al- 
lotment of  the  day's  securities,  either  for  themselves  or  for  those 
who  depend  upon  them,  and  confiding  in  the  institution  which  they 
know  so  well  for  that  wise  forethought  and  positive  protection 
which  widows  and  minors  and  ccstuis  que  trust  would  here  have 
a  right  to  demand  from  the  fiduciary  corporations  governed  by 
ourselves  and  our  associates.  When  there  is  question  of  borrowing 
instead  of  buying,  the  humblest  city  householder,  or  the  remotest 
farmer  owning  a  few  hectares  of  land,  is  well  aware  that  the  highly 
perfected  system  of  this  wonderful  institution  will  promptly  secure 
for  him  the  few  thousand,  or  it  may  be  only  few  hundred,  francs 
he  needs,  and  upon  terms  as  good  as  can  be  got  by  the  great  pro- 
prietor who  wishes  to  mortgage  for  millions  of  francs  his  vast 
factory,  his  luxurious  hotel,  or  the  wide  demesne  of  his  chateau. 
He  probably  does  not  know  what  a  trust  company  means,  but  he 
knows  perfectly  well,  in  his  own  way,  what  a  trust  company  is; 
for  his  knowledge  is  drawn  from  personal  experience,  and  though 
the  trust  which  operates  in  his  favor  is  not  a  legal  one,  but  is 
voluntarily  assumed  and  administered  without  direct  authorization, 
he  sees  that  it  gives  to  him  the  best  of  securities  as  an  invesment 
for  his  savings,  the  highest  price  when  he  wishes  to  convert  his 
holdings  into  cash,  a  constant  market  for  whatever  he  must  sell, 
a  borrowing  capacity  which,  in  the  measure  of  his  wants,  is  as  good 
and  as  certain  as  that  of  the  richest  banker,  and,  above  all,  that  as- 
surance of  fair  treatment  and  watchful  interest  which  permits  him 
to  gel  not  only  what  he  wants,  and  when  and  where  he  wants  it,  but 
to  discharge  his  obligations  quickly  <>r  slowly  as  he  may  wish,  and 
either  in  a  single  sum  or  by  that  kindly  process  of  amortization 
through  which  the  principle  of  a  debt  is  paid  whilst  one  seems  to  be 
paying  only  the  interest. 


486  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

When  we  approach  other  establishments  than  those  of  which 
the  Credit  Foncier  is  the  type,  and  enter  a  field  where  banking,  in 
the  ordinary  sense,  presents  itself  as  the  main  feature,  the  same 
principles  apply  and  the  same  facilities  exist.  Institutions  like  the 
Credit  Lyonnais  and  the  Societe  Generale,  in  order  to  meet  the 
wants  of  all,  maintain  not  only  great  central  bureaus  in  the  principal 
cities,  but  numerous  branches  all  over  the  land,  as  do  many  of  the 
British  banks,  and  deal  as  cheerfully  and  as  courteously  with  a 
matter  of  a  hundred  francs  as  with  one  of  a  hundred  thousand; 
each  branch  having  all  the  facilities  of  the  main  office,  and  serving 
as  an  automatic  and  costless  distributer  of  capital  without  those 
disturbances  that  are  here  incident  to  the  compulsory  flow  of 
currency  which  occurs  whenever  the  crops  must  be  moved  or  some 
unusual  condition  be  met  at  points  distant  from  the  financial  centers. 
The  incessant  turnover  of  money  in  the  hands  of  these  institutions, 
its  elasticity  and  fluidity  under  the  system  of  management  pursued, 
surpass  anything  to  which  we  are  accustomed  in  this  country;  for, 
practically  speaking,  except  as  against  operations  deemed  to  be  un- 
wise or  dangerous,  no  honest  borrower  in  town  or  country  is  ever 
refused  what  he  may  reasonably  ask,  be  the  times  prosperous  or 
trying.  Of  course,  such  facilities,  covering  so  broadly  the  field  here 
occupied  in  part  by  banks  and  in  part  by  trusts  companies,  and  ad- 
ministering absolutely  without  limit  to  the  needs  of  all  classes,  and 
to  active  and  continuous  as  well  as  to  casual  and  incidental  business, 
would  not  be  possible  if  our  methods  were  observed;  for  at  times 
the  resources  of  any  one  of  the  typical  institutions  I  have  named 
might  be  taxed  to  an  extent  which,  under  our  system  of  manage- 
ment, would  bring  about  either  an  abrupt  curtailment  of  facilities 
or  possible  disaster.  But  in  France  even  the  largest  financial  in- 
stitutions look  upon  rediscount  and  mutual  accommodation  as  a 
most  proper  and  advisable  source  of  relief  under  all  circumstances; 
and  banks  and  similar  establishments,  whose  capital,  surplus,  and 
deposits  range  from  one  or  two  hundred  millions  of  dollars  to 
twice  as  much,  and  which  are,  therefore,  stronger  than  almost 
any  of  the  banks  of  our  country,  and  are  certainly  entitled  to  be 
jealous  of  their  credit  and  standing,  think  nothing,  at  any  time,  of 
rediscounting  their  loans  with  each  other  or  with  the  Bank  of 
France  to  the  extent  of  many  millions  of  francs,  thus  giving  to  their 


TRUST  COMPANY  SECTION  487 

resources  a  liquidity  and  a  responsiveness  to  passing  conditions, 
the  lack  of  which  in  our  own  system  all  of  us  have  felt  on  many 
occasions.  This  solidarity  of  operation  and  of  policy,  coupled 
with  the  system  which  makes  the  credit  of  these  institutions  equal 
to  cash  for  operations  large  and  small,  and  throughout  the  whole 
country  and  all  of  its  dependencies  as  thoroughly  as  in  the  heart 
of  Paris,  is  a  phase  of  economics  demanding  our  most  thoughtful 
attention. 

But  at  the  bottom  of  the  whole  fabric  of  France  finance,  so 
democratic  in  its  character,  and,  in  the  commercial  and  industrial 
sense,  exhibiting  so  largely  an  unsolicited  fiduciary  character,  stands 
the  Bank  of  France,  itself  the  very  essence  of  the  spirit  of  which 
we  have  spoken.  This  bank,  by  all  odds  the  most  powerful  in  the 
world,  and  at  the  same  time  the  most  directly  subservient  to  popular 
necessities,  has  never,  even  in  the  times  of  war  or  revolution,  re- 
fused to  administer  to  the  honest  requirements  of  the  community; 
and  yet,  in  spite  of  its  liberality,  its  losses  are  always  insignificant, 
never,  so  far  as  I  have  been  able  to  learn,  having  risen  as  high  as  the 
one  hundredth  part  of  one  per  cent,  of  its  operations,  and  being,  of 
course,  wholly  lost  to  sight  in  the  immense  volume  of  its  profits. 
The  source  of  its  security  lies  always  in  the  unbounded  aid  given  by 
it  to  legitimate  business  and  in  the  confidence  it  thus  inspires,  being, 
in  the  last  analysis  and  in  virtue  of  its  wise  generosity,  its  own 
clearing  house,  and  so  being  permitted  to  offset  its  obligations 
against  its  resources  by  the  simplest  processes  of  bookkeeping,  with- 
out inconvenient  dispersion  of  funds. 

In  the  same  way  in  which  the  Credit  Foncier  has  made  itself 
a  voluntary  trustee  for  the  long-time  operations  of  the  country, 
the  Bank  of  France  has,  on  its  side,  made  itself  a  like  trustee  for 
the  rapid  operations  of  modern  commerce,  securing  directly  or  in- 
directly to  every  worthy  trader,  however  humble,  constant  and 
liberal  credit,  by  encouraging  the  habit  of  replacing  open  accounts 
bv  acceptances,  and  thus  making  each  man's  bill-case,  instead  of  his 
ledger,  the  stronghold  of  his  business.  Tt  demands  at  least  two 
names  on  every  commercial  bill,  SO  as  to  secure  the  record  of  a 
legitimate  transaction;  but  it  will  discount  any  good  bill  that  is 
not  less  than  forty  francs,  or  eighl  dollars,  and  does  as  a  matter 
of  fact  discount  each  day  in  the  year,  among  the  numberless  trading 


488  TRACT1CAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

documents  which  pass  through  its  hands,  from  twenty  thousand  to 
thirty  thousand  inland  hills  of  exchange  of  which  not  one  exceeds 
in  amount  a  hundred  francs,  or  twenty  dollars.  As  to  loans  upon 
securities,  where  of  course  a  single  name  suffices,  it  will  accept  any 
collateral  that  is  essentially  solid,  whether  it  represents  bonds  of 
the  state  of  Wisconsin,  stocks  of  the  city  of  New  York,  the 
obligations  of  a  bank  in  China,  the  consols  of  England  or  Russia, 
or  the  rentes  of  France.  It  wishes  to  give  to  every  Frenchman, 
so  far  as  wisdom  may  permit,  the  facilities  necessary  for  the  prose- 
cution of  any  legitimate  business  at  home  or  abroad,  and  to  do  this 
in  a  manner  affording  the  utmost  ease  consistent  with  ordinary 
prudence. 

It  may  seem  but  little  pertinent  to  my  subject  that  I  should 
speak  in  so  marked  a  way  of  an  institution  which  is  pre-eminently 
a  bank,  and  not  a  trust  company ;  but  I  do  so  in  order  to  explain 
how  it  happens  that  other  institutions,  which  from  their  very  nature 
must  do  much  that  is  expected  of  trust  companies  here,  can  do  it 
readily  and  always,  and  without  risk  or  inconvenience.  These  other 
institutions  know  that  in  their  hour  of  need  they  can,  with  the 
certainty  of  prompt  response,  apply  to  the  Bank  of  France  for  any 
relief  they  may  require,  and  that  the  bank  itself  is  safe  in  granting 
such  relief.  But  it  is  not  alone  its  six  hundred  millions  of  dollars 
of  metallic  reserve,  coupled  with  other  resources  just  as  boundless 
in  their  way,  which  give  to  the  Bank  of  France  its  wonderful 
strength,  important  as  its  cash  and  securities  are  in  the  estimate 
of  its  influence.  The  secret  of  its  power  lies  in  the  fact  that  it  has 
made  itself  the  trustee  of  the  nation's  credit,  and  that,  by  perfecting 
a  system  which  secures  instant  accommodation  on  any  scale,  how- 
ever large  or  however  small,  for  every  proper  transaction  of  in- 
dustry, commerce,  or  finance,  it  has  become  the  reservoir  of  the 
nation's  wealth  and  the  adjuster  of  the  nation's  accounts,  rarely 
making,  or  being  expected  to  make,  any  other  output  of  cash  than 
that  which  constitutes  the  small  change  of  the  daily  life  of  a  great 
and  energetic  people. 

We  have  much  to  learn  from  our  colleagues  abroad,  and  I  be- 
lieve that  we  are  disposed  to  profit  by  our  opportunities ;  though 
young  and   vigorous  peoples,  temporarily  raised  above  the  neces- 


TRUST  COMPANY  SECTION  489 

sity  of  close  economy,   are  somewhat  prone  to  believe  their  own 
judgment  the  best  that  exists. 

Some  years  ago  I  laid  before  many  of  the  ablest  officers  of  our 
banks  and  trust  companies  all  the  ideas  which  are  suggested  in 
this  paper  and  many  more  of  a  kindred  nature,  and  offered,  with 
their  co-operation,  to  put  them  to  a  test,  so  far  as  circumstances 
might  prudently  allow ;  but  although  I  everywhere  got  a  respect- 
ful hearing,  and  sometimes  a  sympathetic  one,  I  was  told  that  my 
suggestions  were  in  advance  of  the  times.  They  may  have  been ; 
but  some  of  them  have,  from  the  sheer  force  of  events,  been  since 
carried  into  effect,  and  others  are  daily  presenting  themselves 
directly  to  the  consideration  of  able  and  experienced  students  of 
finance,  and  will  not  fail  to  command  attention.  Indeed,  I  am 
sure  that  the  trend  of  modern  civilization  and  the  ever-growing 
unity  of  the  human  family,  commercially  as  well  as  socially,  will 
bring  us,  in  respect  to  the  work  of  both  banks  and  trust  companies, 
to  adapt  to  our  new  and  somewhat  unique  conditions  the  plans 
and  expedients  which  have  been  envolved  from  the  larger  ex- 
perience, the  profounder  thought,  and,  I  repeat  it  advisedly,  the  more 
democratic  financial  procedure,  of  the  older  world — a  world  which, 
though  it  may  have  learned  some  lessons  from  us,  has  taught  us, 
and  has  still  to  teach  us,  many  more  than  we  are  likely  to  be  able 
to  offer  to  it  for  very  many  years  to  come. 


INVESTIGATION  AND  AUDIT  OF  THE  ACCOUNTS  OF  A 

TRUST  COMPANY 

ADDRESS    DELIVERED    BY    A.     0.     KITTREDGE,    C.    P.     A.,    OF    NEW     YORK,    BEFORE    TIM: 
AMERICAN     BANKERS'    ASSOCIATION,    AT     NEW     ORLEANS,    NOVEMBER,     1002. 

Modern  conditions  demands  regular  and  systematic  investiga- 
tion and  report  or  audit  in  all  divisions  of  business.  The  trust 
company,  which,  in  the  short  time  that  it  has  been  before  the 
public,  has  been  exempt  from  various  rules,  should  be  no  exception 
in  this  regard. 

Trust  companies  and  banks  are  in  the  same  general  class,  and 
in  a  sense  the  same  business  rules  would  apply  to  the  two.     Banks 


49° 


PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 


arc  systematically  examined  or  audited  under  provisions  of  the  law, 
and  while  trust  companies  are  occasionally  examined  by  represen- 
tatives of  the  banking  departments  of  the  different  states  under 
which  they  are  organized,  at  the  same  time  regular  and  complete 
audits  are  with  them  the  exception  rather  than  the  rule. 

Banks,  upon  the  basis  of  natural  selection  and  long  experience, 
have  reached  what  might  be  described  as  uniformity  in  accounting. 
That  is,  the  features  of  their  accounting  systems  are  so  much  alike 
that  the  examination  of  one  bank  is  a  fair  preliminary  study  for 
the  examination  of  various  other  banks.  On  the  other  hand,  trust 
companies  are  yet  so  new  that  in  various  directions  their  account- 
keeping  is  crude.  Their  methods,  if  not  experimental,  are  yet  in 
a  condition  not  thoroughly  worked  out  or  reduced  to  definite  form. 

If  any  excuse  were  necessary  for  obtruding  upon  the  attention 
of  this  assembly  at  this  time  some  remarks  about  the  investigation 
and  audit  of  trust  companies,  the  same  is  contained  in  the  preceding 
remarks. 

In  every  modern  business  venture  or  organization  for  business 
purposes,  a  very  considerable  part  of  the  undertaking  rests  upon 
the  basis  of  credit  and  upon  the  intelligence  or  care  with  which 
its  managers  conduct  the  business.  Accordingly,  in  the  pro- 
spectus of  various  trust  companies,  we  find  paraded  at  the  head 
of  the  list  from  twenty  to  twenty-five  men,  who  are  the  directors 
or  trustees  of  the  organization  and  whose  high  standing  in  the 
community  is  supposed  to  give  credit  to  the  company  with  which 
they  are  connected. 

The  public  does  not  stop  to  think  that  at  best  a  very  small  num- 
ber of  men  stand  for  the  actual  transactions  and  policy  of  a  com- 
pany doing  business.  Such,  however,  is  the  case,  and  the  trustees, 
high  minded  men  as  they  very  generally  are,  require  the  services 
of  an  expert  examiner,  from  time  to  time,  in  order  that  they  may 
know  that  those  put  in  immediate  charge  of  the  affairs  of  the  com- 
pany are  not  mismanaging  their  trust.  On  the  other  hand,  the 
stockholders  and  the  public  at  large  have  rights  likewise  in  this 
regard. 

A  trust  company  may  be  described  as  a  corporation  authorized 
by  law  to  undertake  every  kind  of  trustee  work,  and,  in  addition  to 
this,  to  do  a  general  banking  and  financial  business.     A  trust  com- 


TRUST  COMPANY  SECTION  491 

pany  has  a  wider  business  scope  than  a  bank.  While  it  can  furnish 
its  customers  with  every  facility  which  the  bank  can  supply,  it  can 
render  them  a  great  many  services  which  the  safest  and  best 
equipped  bank  in  the  country  cannot.  A  bank  cannot  offer  its 
customers  the  facilities  which  a  trust  company  offers,  because  from 
the  special  character  of  its  business  and  its  close  relation  with 
trade,  it  has  always  been  hedged  around  by  law  with  restrictions 
deemed  necessary  in  case  of  purely  commercial  undertakings. 
Trust  companies  exemplify  enlarged  banking  powers  adapted  to  the 
ever  growing  requirements  of  modern  business.  They  do  not  com- 
pete with  or  usurp  the  places  of  banks,  but  in  themselves  use  the 
banks,  while  with  their  transactions  they  go  over  and  beyond  any- 
thing for  which  banks  were  created. 

The  functions  of  a  trust  company  are  numerous  and  far  reach- 
ing, comprising  various  matters  from  the  management  of  estates 
to  ordinary  trusteeships,  and  from  a  banking  department  on  the  one 
hand  to  an  underwriting  syndicate  on  the  other.  They  include, 
in  addition  to  ordinary  banking,  the  following  powers  among 
others:  Acting  as  trustee  under  mortgages  to  secure  bond  issues; 
trustee  for  married  women  with  respect  to  their  separate  property; 
guardian,  receiver,  or  trustee  of  the  estate  of  minors;  executor  or 
trustee  under  wills ;  committee  of  estates  of  lunatics,  idiots,  and 
persons  of  unsound  mind ;  administrator,  trustee,  guardian,  ex- 
ecutor, receiver  and  assignee  of  insolvent  estates,  manager  of  estates 
of  every  kind  during  the  temporary  or  permanent  absence  of  the 
owners,  or  for  persons  advanced  in  years,  or  for  persons  wishing 
to  place  the  care  and  management  of  their  property  in  the  hands 
of  a  capable  agent ;  collection  of  rents,  interest,  dividends,  etc. ; 
acting  as  registrar  and  transfer  agent  of  the  capital  stock  and 
bonds  of  corporations ;  general  agent  for  non-residents  and  invalids ; 
general  agent  for  foreign  municipalities,  corporations,  etc.,  for  the 
transaction  of  approved  financial  business;  the  general  execution 
of  legal  trusts,  and  many  others  both  general  and  special. 

Trust  companies  exist  under  and  by  virtue  of  state  laws.  The 
laws  in  the  several  stales  do  not  agree,  and  some  of  them  are  more 
favorable  to  trust  companies  than  others.  All  of  them  demand 
reports  from  the  trust  companies  annually  and  in  some  cases  more 
frequently.     In  most  of  the  states  there  is  provision  for  occasional 


492  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

ixamination  of  trust  companies  by  representatives  of  the  state  bank- 
ing department. 

The  official  bank  examinations  by  national  bank  examiners' 
throughout  the  country  are  frequently  characterized  as  being-  in- 
sufficient and  in  many  cases  unsatisfactory.  The  pay  allotted  to 
bank  examiners  is  notoriously  small  and  the  time  in  which  the  ex- 
amination of  a  bank  is  ordinarily  made  is  altogether  too  short. 
There  is  no  basis  of  comparison  between  the  examination  of  a 
bank  as  commonly  conducted  and  that  of  a  trust  company  as  cir- 
cumstances demand.  There  is  an  entirely  different  class  of  talent 
required  in  the  examination  of  a  trust  company. 

As  with  banks  so  with  trust  companies.  We  find  different 
organizations  doing  different  classes  of  business,  and  yet  the  range 
of  difference  with  banks  is  very  much  less  than  the  range  of  dif- 
ference with  trust  companies.  We  find  one  trust  company  specially 
organized  to  take  care  of  the  financial  interests  of  a  certain  clique 
of  wealthy  men,  or  to  look  after  the  investments  of  a  certain  circle 
of  men.  We  find  alongside  of  it  another  trust  company  doing  the 
same  thine  for  another  set  of  men.  While  in  the  one  case,  rail- 
roads  and  street  car  lines  may  be  the  principal  features,  in  the 
other  it  is  industrial  operations,  including  perhaps  real  estate 
matters.  However  we  approach  the  subject,  we  find  no  two  trust 
companies,  speaking  within  limits,  doing  exactly  the  same  kind  of 
business.  There  is  an  individuality  about  each,  and  therefore  we 
come  back  to  the  previous  conclusion  that  the  examination  of  a 
trust  company  must  proceed  upon  original  lines ;  that  it  cannot  be 
based  upon  work  done  for  other  trust  companies,  or,  rather,  that 
it  cannot  be  done  after  a  general  pattern  supposed  to  fit  other  trust 
companies. 

It  would  seem  to  be  the  opinion  of  some  of  those  who  are  giving 
but  brief  consideration  to  the  subject,  that  it  is  possible  to  devise 
a  plan  or  scheme  of  trust  company  investigations  and  examination 
that  is  at  once  very  simple  in  its  elements  and  at  the  same  time  very 
comprehensive  in  its  results.  I  have  been  urged  to  present  on  this 
occasion  a  blank  that  might  be  used  by  examiners  of  trust  com- 
panies. As  already  stated,  a  single  blank  is  inadequate.  It  does 
not  begin  to  reach  the  case,  and  if  we  were  to  take  any  individual 
trust  company,  and  in  the  light  of  complete  knowledge  of  its  affairs 


TRUST  COMPANY  SECTION  493 

prepare  a  blank  or  set  of  blanks  by  which  its  periodical  examina- 
tion should  be  conducted,  we  should  find  that  this  blank  or  set  of 
blanks  would  not  apply  to  any  one  of  the  numerous  trust  companies 
working  side  by  side  with  that  to  which  the  first  set  of  blanks  was 
devoted. 

The  examiner  of  a  trust  company  must  become  familiar  with 
the  different  undertakings  of  the  several  departments  of  the  com- 
pany. He  will  approach  each  as  a  new  proposition.  He  will  bring 
to  bear  in  his  work  all  the  experience  that  has  accrued  in  the  in- 
vestigation of  various  industrial  and  mercantile  operations,  and  he 
will  proceed  with  his  undertaking  cautiously  and  ever  with  an  eye 
looking  out  for  the  unexpected. 

First  will  be  the  division  of  the  trust  company  into  its  several 
departments.  These  are  more  or  less  numerous  according  to  cir- 
cumstances. Each  of  them  is  more  or  less  developed,  likewise,  ac- 
cording   to   circumstances. 

He  first  takes  up.  for  example,  the  department  devoted  to  in- 
dividual trusts  and  the  management  of  estates,  including  such 
matters  as  executorships  and  trusteeships  under  wills.  In  this 
division  he  must  follow  out  each  individual  trust  and  examine  it 
on  the  merits  of  the  case  and  not  from  the  standpoint  of  any  fixed 
rule. 

Xext,  for  example,  he  takes  up  the  question  of  administration, 
and  in  this  department  considers  the  company  from  the  standpoint 
of  administrator,  trustee,  guardian,  receiver,  or  assignee,  as  the 
case  may  be.  Here  again  each  individual  undertaking  must  be 
examined  from  beginning  to  end  in  order  to  put  into  the  report  that 
which  he  is  i  d  to  present. 

Again  he  takes  up  the  question  of  trusteeship  under  mortgages 
issued  by  corporations  or  municipalities.  Here  there  is  the  inquiry 
along  specific  lines  to  be  assured  that  the  company  is  not  making 
mistakes  and  is  not  abusing  the  confidence  reposed  in  it.  And  so 
we  might  go  through  all  the  different  divisions  of  a  trust  com- 
pany's bu  .  including  membership  in  underwriting  syndicates, 
guardianship,  management  of  estates  in  the  absence  of  owners, 
agencyship  for  the  collection  of  interest,  rents,  etc.,  general  finan- 
cial agency,  registrarship,  etc. 

Since  a  trust  company's  functions  are  so  various  and     o  numer- 


494 


PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 


ous,  an  examination  into  its  affairs  for  the  purpose  of  certifying 
as  to  its  condition  is  other  than  a  simple  matter.  No  rule  expressed 
in  few  words  can  be  laid  down  for  the  purpose.  No  single  blank 
or  form  will  meet  the  exigencies  of  the  case,  but  the  examiner  must 
patiently  check  up  each  of  the  several  departments  of  the  trust 
company  and  in  each  department  follow  out  each  of  the  several 
undertakings  laboriously  and  patiently,  until  a  definite  conclusion 
is  reached. 

The  examiner  who  approaches  a  trust  company  for  the  purpose 
of  audit  and  investigation  should  know  something  of  the  origin 
and  rise  of  these  corporations  in  order  to  be  in  a  position  to  judge 
of  their  operations.  What  is  there  about  trust  companies  that 
enables  them  to  enter  a  field  to  all  appearances  fully  occupied,  and 
in  a  period  of  less  than  a  quarter  of  a  century  to  succeed  to  the 
prominence  which  they  at  present  hold? 

This  has  been  answered  by  one  writer  on  the  basis  of  the  theory 
of  natural  selection.  According  to  this  writer,  a  gradual  change 
in  our  financial  conditions  and  the  increase  in  our  national  wealth 
has  led  to  corresponding  changes  in  the  structure  of  our  monetary 
institutions,  and  has  resulted  in  the  formation  of  establishments 
suited  to  our  changed  environment,  in  the  form,  on  the  one  hand, 
of  trust  companies  with  large  capital  and  surplus  to  conserve,  and 
on  the  other  hand,  of  banks  solidified  and  amplified  by  amalgama- 
tion in  order  to  be  better  able  to  handle  the  growing  volume  of  our 
enormous  trade.  It  was  inevitable  that  the  great  stream  of  our 
bankable  wealth,  which  has  enormously  increased  of  late  years, 
should  sooner  or  later  become  divided  in  this  way,  in  order  to 
separate  that  portion  which  was  actively  engaged  in  trade  from 
our  invested  capital ;  and  the  extraordinary  development  of  the 
trust  companies  already  formed  and  the  new  life  infused  into  bank- 
ing show  how  beneficial  to  both  the  change  has  been  under  the  new 
classification  and  division. 

The  whole  design  of  banking  is  to  further  and  facilitate  trad- 
ing operations,  in  which,  as  a  rule,  two-thirds  of  its  resources  are 
directly  employed  in  the  form  of  discounts,  and  hence  are  unavail- 
able for  any  other  purpose.  Trust  companies,  on  the  other  hand, 
instead  of  using  their  capital  for  discounts  of  personal  obligations, 
keep  it  in  hand  for  other  uses.     Trust  companies  are  not  concerned 


TRUST  COMPANY  SECTION  495 

with  trade  risks.  Accordingly,  they  are  not  shackled  by  restrictions 
imposed  to  guard  against  trade  risks.  The  trust  company  of  to-day, 
combining  as  it  does  every  function  of  financial  business,  stands 
with  respect  to  the  financial  world  as  the  department  store  stands 
in  the   commercial   world. 

One  or  two  general  directions  may  be  given  in  closing:  What 
the  examining  auditor  must  do  in  order  to  prepare  a  complete  re- 
port of  the  affairs  of  a  trust  company,  can  be  determined  by 
measuring  the  affairs  of  the  trust  company  by  a  balance  sheet  and 
profit  and  loss  statement.  It  is  customary  with  trust  companies, 
as  well  as  with  banks,  to  put  forth  from  time  to  time  a  statement 
of  their  affairs.  This  statement  approximates  a  balance  sheet,  but 
is  not  complete.  On  the  other  hand,  a  complete  balance  sheet,  or 
the  outline  of  a  complete  balance  sheet,  will  give  the  standard  by 
which  the  affairs  of  a  trust  company  may  be  judged. 

Let  us  consider  just  what  these  broad  statements  mean.  The 
affairs  of  every  trust  company,  as  well  as  of  every  other  business 
institution,  are  susceptible  of  statements  in  balance  sheet  form. 
What  are  the  assets  and  what  are  the  liabilities  ?  Preliminary  to 
any  balance  sheet  statement  must  be  the  profit  and  loss  statement. 
What  are  the  expenses?  What  are  the  revenues?  The  profit  and 
loss  statement  included  with  the  balance  sheet  statement  makes 
the  latter  complete. 

At  the  outset,  then,  let  the  examiner  lay  down  broadly  the  ac- 
counts that  to  him  seem  necessary  to  constitute  a  balance  sheet  of 
the  business.  A  balance  sheet  can  contain  nothing  but  assets  and 
liabilities.  What  are  the  names  of  the  accounts  necessary  to  rep- 
resent correctly  the  assets  of  the  company?  What  are  the  names 
of  the  accounts  necessary  to  show  correctly  the  liabilities  of  the 
company? 

In  this  analysis  he  must  not  be  content  with  generalities,  but 
instead  must  enter  into  details.  The  resulting  statement  will  be 
very  much  more  extensive  than  that  in  the  form  given  to  the  public, 
and  yet  its  footings  will  be  identical  with  the  footings  of  the  pub- 
lished statement,  provided,  of  course,  that  the  latter  is  correct.  It 
will  not  be  sufficient  to  put  down  in  this  balance  sheet,  for  example, 
so  many  bonds  of  such  and  such  an  issue  and  then  close  that  division 
of   the   account   by   saying    "Other    Stock    Investments."     Instead, 


496  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

the  Other  stock  investments  must  be  laboriously  and  completely 
listed.  Tt  will  not  do  to  put  down  bonds  and  mortgages,  but  in- 
stead bonds  and  mortgages  must  be  enumerated  in  detail.  It  will  not 
do  to  put  down  other  outstanding  accounts.  Instead  these  accounts 
should  be  completely  and  correctly  listed.  It  will  not  do  to  put 
down  cash  on  hand.  Instead  there  should  be  shown  so  much  cash 
in  the  vault,  so  much  in  this  bank  and  so  much  in  another  bank, 
as  the  case  may  be.  Again,  on  the  liability  side,  it  will  not  do  to 
put  down  amount  due  depositors,  without  the  preparation  of  a  com- 
plete list  of  depositors  showing  in  detail  what  makes  up  the  total. 
And  so  we  might  go  on  through  the  entire  list. 

There  are  always  matters  pending  in  trust  company  affairs 
which  among  the  assets  should  be  covered  by  some  such  account 
as  items  in  suspense.  Insurance  paid  in  advance,  and  various  ex- 
penses which  have  been  anticipated  and  which  are  to  be  pro  rated 
out  as  the  months  pass  by,  should  come  under  this  head.  Items 
in  suspense  is  a  very  proper  entry  in  every  balance  sheet,  and  yet 
there  are  comparatively  few  balance  sheets  which  show  it. 

On  the  other  hand,  there  are  various  accrued  expenses  which 
are  not  yet  paid,  but  which  should  go  on  the  liability  side  of  the 
balance  sheet  under  the  head  of  reserves.  Taxes  have  accrued 
upon  a  certain  piece  of  property  and  yet  are  not  due  for  three 
months  to  come.  The  accrued  taxes  to  date  should  be  placed  under 
this  head.  Interest  has  accrued  on  money  borrowed,  but  it  is  not 
payable  for  some  time  to  come.  In  charging  into  expense  the  ex- 
penses which  occur,  reserve  for  interest  should  be  credited.  In 
turn,  when  it  comes  to  the  payment  of  interest  the  reserve  account 
is  debited.  Again  referring  to  suspense,  the  reserve  interest  charge 
is  to  be  managed  the  same  way. 

The  thought  underlying  this  suggestion  is  that  the  auditor  who 
sets  out  to  establish  a  correct  balance  sheet  of  a  trust  company 
thereby  has  pointed  out  to  him  the  direction  in  which  his  investiga- 
tions should  extend,  whereby  he  becomes  cognizant  of  all  the  facts 
of  the  company,  and  whereby  he  gets  into  a  position  to  certify  to 
the  correctness  of  the  statement  he  may  prepare. 


TRUST  COMPANY  SECTION  497 

TRUST  COMPANY  FORMS 

ADDRESS  DELIVERED  BY  ARTHUR  HEURTLEY,  SECRETARY  OF  THE  NORTHERN  TRUST 
COMPANY  OF  CHICAGO,  BEFORE  THE  AMERICAN  BANKERS'  ASSOCIATION,  AT 
MILWAUKEE,   OCTOBER,    IOOI. 

The  first  need  of  a  trust  company  after  it  has  been  duly  or- 
ganized and  has  found  a  suitable  location  in  which  to  transact 
its  business,  is  to  have  suitable  books  and  blanks  for  preserving 
the  details  of  its  transactions  from  day  to  day.  The  officers  are 
usually  men  who  have  had  some  experience  in  bank  work  or  in  the 
practice  of  law,  but  have  seldom  had  an  opportunity  to  make  any 
study  of  the  forms  of  accounting  suitable  to  the  business  of  a  trust 
company,  and  therefore  have  been  obliged  either  to  obtain  assis- 
tance from  older  companions  or  to  work  out  their  own  salvation 
as  best  they  could. 

At  the  last  meeting  of  the  section  a  committee  was  appointed 
to  prepare  a  set  of  forms  suitable  for  a  trust  company  to  use,  and 
the  result  of  their  labors  is  now  in  the  hands  of  many  of  our 
members.1 

The  prime  requisite  trust  company  forms  should  possess  is 
simplicitv.  Too  much  stress  cannot  be  laid  upon  this  point.  Many 
a  blank  book  is  made  so  complicated  by  rulings  and  headings  as  to 
mystify  any  one,  except  those  who  have  been  accustomed  to  using 
it  constantly.  Trust  company  forms  should  tell  their  story  plainly ; 
so  plainly  that  any  one  of  average  intelligence  can  understand 
how  thev  are  to  be  used.  Every  book  and  form  should  be  planned 
with  reference  to  the  entire  system  of  accounting,  so  that  the 
forms  taken  together  will  make  a  complete  and  harmonious  whole. 
Through  all  the  books  there  should  run  a  chain  of  entries  so  made 
as  to  bind  them  together ;  cross  references  should  be  made,  and 
every  entrv  should  show  on  each  book  or  form  whence  it  was  de- 
rived. Tt  should  never  require  the  services  of  a  chartered  account- 
ant to  check  a  proper  system  of  trust  accounting.  The  errors  that 
will  occasionally  creep  in  should  be  found  by  an  almost  automatic 
operation  of  the  system  itself,  combined  with  a  careful  checking 
of  the  entries  each  day.  Every  entry  made  on  one  book  should 
be  capable  of  being  checked  from  at  least  one  or  two  other  books 

'A   large  volume  containing   a   careful   selected   collection   <>f  trusl   com- 
pany forms  was  prepared  and  published  by  the  American   Hankers'  Associa- 
tion, 1906. 
32 


498  PRACTICAL  PROBLEMS  IN  RANKING  AND  CURRENCY 

kept  by  different  clerks.  If  this  plan  is  carefully  followed  up, 
combined  with  the  proper  custody  of  securities  and  cash,  it  seems 
to  me  that  serious  errors  in  the  accounts  as  well  as  defalcations 
w  ill  be  prevented. 

The  cash  and  securities  should  never  be  in  the  custody  or  con- 
trol of  the  same  clerks  that  keep  the  books ;  where  it  is  practicable 
there  should  be  double  custody  of  all  securities.  In  any  event,  a 
careful  record  should  be  made  of  every  security,  interest  coupon, 
or  valuable  paper  taken  to  or  from  the  cash  vault,  and  receipted 
for  by  the  proper  officer  of  clerk. 

There  is  no  particular  mystery  about  accounts  or  bookkeeping 
generally.  Given  a  good  practical  system  of  accounting  with 
simple  forms  handled  by  clerks  of  reasonable  intelligence,  whose 
work  is  carefully  watched  by  the  officers,  and  whose  efforts  to  im- 
prove the  forms  they  use  are  met  by  proper  encouragement,  the 
result  will  be  very  satisfactory.  Perhaps  it  will  be  of  interest  if 
I  attempt  to  briefly  discuss  the  principal  forms  to  be  used  by  a  trust 
company. 

The  first  book  required  is  a  register  of  trusts.  When  a  trust 
is  accepted  by  the  company  it  should  be  entered  upon  this  book, 
which  should  show  the  name  of  the  trust,  the  filing  number  given 
it,  the  date  of  acceptance,  source  of  appointment,  the  total  amount 
of  the  estate  or  trust  fund,  the  attorneys  connected  with  the  trust, 
etc.,  also  the  date  it  is  finally  closed.  In  short,  the  register  should 
give  a  brief  history  of  the  trust,  and  it  is  of  great  utility  as  a  book 
of  ready  reference.  This  book  should  have  an  index.  At  this 
point  I  desire  to  say,  that  in  my  opinion  the  plan  of  giving  every 
trust  a  number  by  which  it  is  known  all  through  the  records  is  a 
good  one.  It  renders  the  correct  filing  of  papers,  etc.,  much  more 
certain,  and  from  practical  experience  I  can  safely  recommend  it. 
All  papers  referring  to  the  trust  should  be  filed  under  the  number 
assigned  it,  and  all  securities  belonging  to  the  trust,  and  filed  in  the 
cash  vault,  should  be  placed  under  a  similar  number. 

Next  to  the  register  of  trusts  come  the  cash  book,  the  general 
journal,  and  the  general  ledger.  The  entries  should  be  made  first 
in  these  books ;  then  from  the  same  tickets  the  proper  entries  should 
be  made  in  the  trust  journal  and  posted  in  the  trust  ledger.  It  is 
from  the  trust  ledger  that  all  statements  of  account  should  be  made, 


TRUST  COMPANY  SECTION  499 

and  the  pages  should  be  so  ruled  and  arranged  that  the  stenographer 
can  take  the  book  and  copy  the  entries  as  made,  the  result  being 
an  account  in  proper  form  for  filing  in  court  or  to  send  to  the  benefi- 
ciaries  in  the  trust   estate. 

A  stock  and  bond  ledger  should  be  kept,  in  which  all  the  stocks 
and  bonds  owned  by  the  company,  or  held  by  it  in  any  trust  capacity, 
should  be  entered,  showing  the  amount  of  each  kind  of  security 
in  the  possession  of  the  company.  This  book  is  not  only  an  ad- 
ditional check  upon  the  trust  and  general  ledger  entries  referring  to 
stocks  and  bonds,  but  it  is  also  a  ready  reference  book  to  turn  to  in 
case  an  officer  of  the  company  desires  at  any  time  to  know  the 
amount  of  any  particular  security  under  the  control  of  the  company. 

One  of  the  important  books  that  should  be  kept  is  a  register  of 
securities,  containing  not  only  bonds  and  stocks,  but  notes  as  well, 
with  full  data  regarding  each  class  of  security.  The  securities  held 
by  each  trust  should  be  entered  by  themselves.  The  book  should 
provide  for  a  record  of  interest  or  dividend  payments,  so  that  from 
time  to  time  when  the  book  is  examined  the  information  as  to  such 
payments  can  be  readily  obtained. 

A  daily  balance  sheet  should  be  kept,  in  which  all  the  totals 
should  be  brought  together  for  the  information  of  the  officers ;  also 
a  tickler  showing  the  due  dates  of  notes,  etc.,  to  be  collected  from 
time  to  time. 

A  daily  memorandum  tickler  is  also  a  useful  book  to  have,  in 
which  should  be  entered  sundry  memoranda  relating  to  the  various 
trusts  that  might  otherwise  be  forgotten  at  the  time  when  most 
needed. 

The  real  estate  loan  records  should  be  very  complete,  as  these 
books  are  being  constantly  referred  to;  and  entries  when  made 
should  be  carefully  checked  by  another  clerk  than  the  one  making 
them.  This  rule  should  apply  to  all  books  kept  by  the  company. 
Full  and  complete  records  should  be  kept  of  all  mailers  relating 
to  rentals  collected,  insurance,  etc.,  also  of  any  securities  that  are 
past  due  or  of  doubtful  value. 

The  expense  account  should  be  abstracted  in  a  book  kept  for 
that  purpose,  and  carefully  compared  and  checked  with  the  general 
led  ■'  r.  Tt  is  also  advisable  to  keep  For  future  reference,  in  a  book 
prepared    for   that    purpose,    memoranda   of   all   conversations  had 


5oo    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

with  prospective  clients.  All  tickets  from  which  the  original 
entries  are  made  should  be  clear  and  concise  in  form,  giving  in 
themselves  all  the  information  necessary  from  which  to  make  per- 
fect entries  on  the  books. 

I  have  not  attempted  to  deal  with  the  many  special  forms  of 
books  and  blanks  relating  to  bond  trusteeships  or  to  the  registra- 
tion and  transfer  of  stocks.  The  large, majority  of  trust  companies 
handle  very  little  of  this  class  of  business,  as  it  naturally  goes  to 
larger  financial  centers.  But  I  have  endeavored  to  treat  of  those 
forms  which  would  prove  useful  to  almost  every  company  in  the 
country  doing  a  trust  business. 

I  am  aware  that  the  loose  leaf  system  of  bookkeeping  is  receiv- 
ing much  attention  in  these  days.  And  I  am  prepared  to  admit 
that  there  are  many  minor  books  in  which  it  can  be  used  to  advan- 
tage. But  I  have  had,  and  still  have,  a  prejudice  against  its  use 
for  books  of  original  entry,  as  it  is  not  a  difficult  matter  to  take 
out  a  leaf  from  a  book  made  on  this  principle,  while  it  is  almost 
impossible  to  detach  a  leaf  from  a  book  properly  made  and  bound 
in  the  regular  manner.  The  book  of  trust  company  forms  re- 
ferred to  a  short  time  since  contains  the  ideas  of  the  committee  upon 
this  subject. 

In  closing  let  me  suggest  that  it  would  be  well  for  every  trust 
company  to  have  one  man  in  their  service  whose  duty  it  shall  be 
not  only  to  keep  books  in  touch  with  its  system  of  accounting,  but 
constantly  to  endeavor  to  improve  and  simplify  its  forms.  Again 
I  repeat,  make  the  forms  as  simple  as  is  consistent  with  full  and 
complete  entries.  See  that  every  account  on  the  general  ledger 
is  checked  by  entries  made  on  another  book  or  other  books.  For 
example,  the  stock  and  bond  account  in  the  general  ledger  should 
agree  with  the  balance  sheet  of  the  stock  and  bond  ledger,  and  also 
with  the  totals  of  stocks  and  bonds  shown  in  the  register  of  securi- 
ties. Then  the  officers  of  the  company  will  seldom  be  troubled  over 
their  system  of  accounting.  The  business  is  eminently  one  of  de- 
tails, which  demand  constant  watchfulness  and  attention,  and  the 
system  that  renders  this  work  easy  to  the  officers  and  employees 
is  the  one  to  follow. 


TRUST  COMPANY  SECTION  501 

AN  ELEMENT  OF  DANGER  TO  BANKS  IN  MUNICIPAL 

BONDS  AS  SECURITY 

ADDRESS  DELIVERED  BY  CLARK  WILLIAMS,  VICE-PRESIDENT  OF  THE  COLUMBIA  TRUST 
COMPANY  OF  NEW  YORK  CITY,  BEFORE  NEW  JERSEY  BANKERS'  ASSOCIATION  AT 
ATLANTIC    CITY,    MARCH,    IQ05. 

In  times  of  progress  such  as  these,  when  conditions  are  con- 
stantly arising  presenting  new  and  varied  problems,  it  is  proper  that 
those  affected  by  these  changes  should  look  carefully  to  their  inter- 
ests in  attaining  a  wise  and  intelligent  solution  of  the  questions 
resulting  from  this  development.  And  the  banker,  the  conservator 
of  the  material  wealth  of  this  great  country,  has  his  duty  along  with 
the  rest  who  in  the  work  of  life  accept  definite  responsibilities.  He 
has,  as  a  continuing  duty,  the  study  of  methods  by  which  to  main- 
tain, under  changing  conditions,  adequate  protection  for  the  great 
interests  he  represents.  One  of  the  problems  with  which  he  is  con- 
fronted in  this  study  of  method  it  is  my  purpose  to  discuss. 

Not  long  ago  a  condition  arose  in  the  financial  development  of 
our  country  which  justified  the  Secretary  of  the  Treasury,  in  the 
exercise  of  his  prerogative,  in  accepting  from  the  banks  as  security 
for  the  deposit  of  public  moneys  the  evidences  of  public  obligation 
other  than  those  of  the  federal  government.  These  obligations  are 
commonly  called  municipal  bonds,  whether  they  be  the  issue  of 
cities,  counties,  school  districts,  or  states.  This,  however,  was  by 
no  means  the  banker's  introduction  to  these  securities,  for  in  the 
development  of  our  public  improvements  not  only  have  they  come 
into  the  counting  room  as  collateral  for  loans  and  as  investments, 
but  I  venture  to  say  there  are  but  few  issues  of  these  bonds  in  which 
the  local  banker  is  not  appealed  to  for  counsel  and  advice.  When 
we  consider  that  the  indebtedness  of  this  character  in  the  United 
States,  after  deducting  sinking  fund  accumulations,  exceeds  $2,000,- 
000,000,  we  arc  able  to  realize  the  enormous  investment  in  municipal 
bonds. 

The  high  public  credit  of  this  country  has  established  for  these 
bonds  an  exceedingly  low  interest  rate,  and  besides  the  federal  sanc- 
tion referred  to,  the  laws  in  all  states  have  discriminated  in  their 
favor  as  a  proper  investment  for  savings  banks  and  trust  funds. 
One  would  suppose  that  the  issue  of  securities  of  this  high  character, 
providing  to  so  large  an  extent   the   investments  of  the  country, 


502  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

would  be  surrounded  by  every  safeguard  for  the  protection  of  the 
issuing  community  and  the  security  of  the  investor.  Is  this  the 
case  ? 

Public  officials  are  usually  unfamiliar  with  the  methods  well 
established  in  the  issue  of  other  securities,  and  often  are  even  with- 
out experience  in  the  issue  of  municipal  bonds  because  of  the  fre- 
quent changes  in  office  tenure ;  yet  this  county  supervisor  or  that  city 
clerk  must  superintend,  according  to  his  own  uncertain  methods  or 
under  the  direction  of  the  purchaser,  the  preparation  and  negotiation 
of  these  bonds,  which  find  their  way  into  the  vaults  of  our  banks  as 
collateral  or  as  investments.  The  purchaser  receives  securities  which 
are  printed  or  cheaply  lithographed  on  blanks  obtainable  from  any 
stationer  or  printer.  If  their  preparation  is  so  elaborate  as  to  re- 
quire the  use  of  plates  after  they  have  served  their  purpose  these 
are  considered  of  small  value,  are  carelessly  held  by  the  printer,  and 
are  apt  to  fall  into  improper  hands.  The  result  is  that  in  no  class 
of  security  have  errors  in  issue  been  so  common  or  duplication  and 
fraud  been  so  widely  carried  on  as  in  municipal  bonds.  Besides 
the  abundant  opportunity  for  error  in  their  preparation  and  execu- 
tion, the  prevailing  method,  or  lack  of  method,  of  issue,  is  almost 
an  invitation  to  the  unscrupulous  to  duplicate  parts  of  or  entire 
issues. 

The  conditions  surrounding  the  issue  of  municipal  bonds,  as  I 
have  stated  them,  may  to  some  seem  to  involve  no  unusual  danger, 
and  I  regret  that  I  am  unable  in  this  short  time  to  prove  my  case 
more  clearly  by  reference  to  many  over-issues  through  carelessness 
or  fraud  that  have  come  to  my  notice.  I  may  mention  a  few,  how- 
ever, of  special  interest: 

Several  years  ago,  one  Quigley  was  considered  to  be  a  reputable 
bond  dealer  in  New  York  City.  The  following  item  from  the 
Bankers'  Magazine  explains  itself:  "On  January  19  it  was 
announced  that  the  Mercantile  National  Bank  at  191  Broadway  had 
been  swindled  out  of  $144,000  by  Edwin  O.  Quigley,  a  well-known 
bond  broker  of  New  York,  of  the  firm  of  Quigley  &  Tuttle,  of  6 
Wall  street.  Quigley  was  arrested,  confessed  his  guilt,  and  was 
afterwards  sentenced  to  fifteen  and  one-half  years'  imprisonment." 

Mr.  William  P.  St.  John,  then  president  of  the  Mercantile 
National  Bank,  made  the  following  statement  in  regard  to  Ouigley's 


TRUST  COMPANY  SECTION  503 

stealings :  "Our  total  advances  to  Quigley  were  $144,000  on  bonds 
of  the  par  value  of  $160,000.  Quigley  has  kept  an  active  account 
with  us  for  some  time.  All  these  bonds  we  now  believe  to  be 
forgeries.  We  discovered  yesterday  that  one  of  these  bonds  was  a 
forgery,  and  to-day  Quigley  admitted  to  us  that  all  of  them  were 
fraudulent.  The  bonds  comprised  $57,000  city  of  Cleveland  bonds, 
$68,000  bonds  of  the  city  of  Springfield,  $35,000  of  the  city  of 
Harrisburg,  and  $6,000  bonds  of  the  city  of  Zanesville." 

Other  banks  out  of  New  York  are  known  to  have  been  victims  of 
Quigley's  frauds,  but  it  is  not  known  how  many  bonds  he  forged. 
The  Brooklyn  Eagle  subsequently  reported:  "It  is  known  that 
F.  R.  Warley.  of  180  Broadway,  New  York,  who  lithographed  the 
bogus  bonds  for  Quigley,  printed  in  all  $640,000  worth.  The  forger 
made  a  statement  to  the  effect  that  Warley  had  no  knowledge  what- 
ever that  his  transactions  were  anything  but  honest." 

Quigley's  method  of  operation  was  as  follows :  On  the  purchase 
of  an  issue  of  municipal  bonds  at  public  offering  or  private  sale  he 
would  give  his  services  in  the  preparation  of  the  documents  without 
cost  to  the  municipality,  arguing  that  his  familiarity  with  the  require- 
ments of  the  investing  public  would  save  inconvenience  and  produce 
better  results — an  attractive  proposition  to  most  public  officials.  A 
lithographer  acting  innocently  or  with  only  the  size  of  his  order  in 
view,  was  then  commissioned  to  produce  two  sets  of  bonds  identical 
in  all  respects.  One  set  would  be  properly  executed  by  the  officials 
and  sold  to  the  public ;  the  other  would  be  duly  signed  and  sealed  by 
Mr.  Quigley  and  deposited  as  collateral  with  the  banks. 

While  Mr.  Quigley  was  thus  successfully  doubling  his  capital  in 
New  York,  Mr.  Z.  T.  Lewis  was  industriously  plying  the  same 
trade  in  Ohio,  with  the  following  results,  as  cited  in  the  Financial 
Record:  "Much  anxiety  is  felt  concerning  the  affairs  of  Z.  T. 
Lewis,  missing  broker  of  Dayton.  Ohio,  who  was  recently  awarded 
$300,000  McKeesport.  Pa.,  bonds.  Forged  bonds  have  turned  up 
to  the  amount  of  $56,000,  and  it  is  believed  that  the  amount  will 
reach  over  $100,000.  Twenty  thousand  dollars  fraudulent  bonds 
of  Highland  County;  $25,000  Kenton  City  School,  and  $10,000 
Tippecanoe  City  School  bonds  have  come  to  light.  The  bank  of 
which  Mr.  Lewis  was  president  has  been  closed." 

Twenty  years  ago  the  state  of  Virginia  ordered  engraved  a  large 


504    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

issue  of  bonds,  for  which,  owing  to  a  change  of  administration,  the 
state  officials  refused  to  pay.  Because  of  the  indifference  of  these 
officials,  the  blank  bonds  were  sold  by  the  express  company  to  pay 
charges,  and  were  widely  scattered:  They  have  been  turning  up  in 
small  blocks  ever  since,  variously  signed,  with  and  without  seals. 

I  have  frequently  requested  samples  of  work  from  lithographers 
who  have  solicited  our  business,  to  confirm  my  opinion  of  their 
average  carelessness,  and  I  have  often  been  given  bonds  with  coupons 
attached  bearing  the  lithographed  facsimile  signature  without  the 
slightest  attempt  at  cancellation. 

In  advocating  the  more  adequate  protection  of  municipal  securi- 
ties to  a  firm  of  Chicago  bond  dealers  some  years  ago,  I  took  occasion 
to  display  a  lithographed  blank  bearing  the  likeness  of  a  woman  as 
one  of  the  vignettes,  stating  that  these  blanks  could  be  obtained  by 
the  cart-load  from  any  stationer  or  lithographer.  My  listener  looked 
at  it  in  amazement,  informing  me  that  the  portrait  on  this  blank  was 
the  likeness  of  his  wife,  and  expressing  great  surprise  that  the 
original  plates  which  had  been  prepared  for  his  exclusive  use  had 
found  their  way  into  the  profane  hands  of  New  York  lithographers. 

It  was  my  duty  years  ago  to  examine  the  loans  of  an  institution 
carrying  a  large  amount  of  municipal  bonds  as  collateral.  One- 
third  of  the  securities  were  printed  in  the  same  colored  ink,  on  the 
same  blanks.  There  was  absolutely  no  evidence  that  these  bonds 
were  what  they  purported  to  be.  None  of  the  officers  of  this  insti- 
tution were  familiar  with  the  signature  of  the  mayor  of  this  town, 
of  the  county  clerk  of  that  county.  The  loans  were  practically 
secured  only  by  the  obligation  of  the  borrower.  For  banks  loaning 
on  such  supposed  securities  to  ascertain,  by  investigation,  the 
genuineness  of  every  block  of  bonds  offered  as  collateral  would  entail 
an  enormous  amount  of  research,  consuming  frequently  weeks  of 
time  and  practically  prohibiting  loans  of  this  character. 

At  times  the  loss  of  credit  to  municipalities  as  the  result  of 
irregularities  or  fraudulent  issues  of  their  securities  has  been  serious, 
and  a  just  prejudice  exists  in  the  minds  of  many  an  investor  that 
militates  against  the  broad  market  which  these  securities  deserve. 
The  danger  to  investors  is  only  second  to  that  of  bankers  loaning  on 
the  bonds.  The  principal  and  interest  of  such  bonds  are  very  fre- 
quently payable  at  the  office  of  the  dealer  purchasing  them,  and  he 


TRUST  COMPANY  SECTION  505 

has  only  to  furnish  his  customers  fictitious  bonds  and  then  to  pay 
the  coupons  as  they  are  presented  at  his  office,  thus  providing  him- 
self with  a  cheap  working  capital  which  is  capable  of  being  indefi- 
nitely increased  to  the  limit  of  the  confidence  of  his  clients. 

The  schemes  for  obtaining  money  by  means  of  the  irregular  issue 
of  these  bonds  could,  at  the  hands  of  a  brainy  scoundrel,  be  varied 
indefinitely,  and  it  is  impossible  to  state  the  extent  to  which  such 
business  is  carried,  for  so  long  as  the  borrower  pays  his  interest 
promptly  and  takes  up  his  loans  at  maturity,  their  fraudulent  char- 
acter remains  undiscovered.  Nor  is  the  unprincipled  dealer  the  only 
danger  to  be  provided  against;  municipal  officials  and  their  clerks 
are  as  prone  to  commit  errors  as  other  human  beings,  and  instances 
are  not  wanting  where  bonds  prepared  or  executed  in  a  manner  not 
satisfactory  to  the  purchasers  have  been  laid  aside,  other  bonds 
executed,  and  afterwards  the  original  bonds  sold. 

Enough  has  been  said  to  show  the  points  of  danger  and  the 
necessity  for  adequate  remedy.  This  remedy  must  lie  in  a  method 
of  issue  which  will  properly  protect  the  interest  of  all  concerned, 
and  at  the  same  time  so  serve  their  convenience  as  to  render  the  plan 
attractive.  As  far  as  it  is  possible,  such  a  plan  must  be  an  abso- 
lute protection  to  communities  issuing  the  obligation  against  the 
payment  of  fraudulent  bonds  and  coupons;  to  public  officials  who 
are  responsible  for  the  proper  issue  of  these  securities  and  who  may 
lack  the  requisite  experience ;  to  dealers  who,  under  the  present  con- 
ditions are  practically  the  guarantors  of  the  bonds  they  sell,  a  need- 
less and  heavy  responsibility ;  to  bankers  offered  a  high  class  of 
collateral  for  loans,  but  having  no  facilities  for  determining  its 
genuineness  or  legality ;  to  investors  willing  to  accept  low  rates  of 
interest  on  obtaining  absolute  security,  and  who  yet  are  not  pro- 
tected against  entire  loss  through  fraud. 

Such  a  plan  must  begin  with  the  very  inception  of  the  issue  and 
end  only  with  the  delivery  of  the  completed  instruments  to  the  proper 
city  officials  or  the  purchaser,  and  every  step  between  must  be 
protected  with  effective  safeguards  under  the  supervision  of  a  respon- 
sible corporation.  The  safeguards  surrounding  the  issue  of  securi- 
ties listed  on  the  principal  exchanges,  where  duplication  and  over- 
issues are  practically  unknown,  at  once  suggest  themselves.  Their 
protection  primarily  lies  in  engraving  by  responsible  bank-note  com- 


5o6    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

panies  from  steel  plates,  together  with  the  evidence  of  genuineness 
of  a  responsible  trust  company,  whether  it  be  in  the  signature  under 
the  trustee's  certificate  on  bonds  or  in  the  signature  indicating  the 
registration  or  the  proper  transfer  of  stock.  Municipal  bonds  should 
be  carefully  engraved  by  a  responsible  company,  producing  the  best 
workmanship  and  giving  absolute  security  during  the  different 
stages  of  preparation,  as  well  as  exercising  a  careful  guardianship 
over  the  engravings  afterwards,  to  prevent  either  plates  or  impres- 
sions falling  into  improper  hands.  A  certificate  signed  by  a  respon- 
sible fiduciary  institution  should  appear  on  each  bond,  evidencing 
the  genuineness  of  execution  and  a  guarantee  against  over-issue 
through  carelessness  or  fraud. 

Because  of  the  peculiar  conditions  under  which  municipal  bonds 
are  issued,  the  question  of  legality  is  of  so  great  importance  to  the 
investor  that  such  investigations  should  be  made  by  counsel  spe- 
cially qualified  by  experience  to  pass  upon  the  intricate  questions  in- 
volved in  their  validity  of  issue.  A  certificate  of  legality  should 
appear  on  each  bond,  or  a  reference  to  the  fact  that  such  legal 
examination  has  been  made  and  that  the  legal  papers  relating  to 
the  issue  are  filed  with  the  trust  company  which  would  be  responsible 
for  the  genuineness  of  the  certificate — in  this  way  avoiding  the  con- 
stantly recurring  expense  and  delay  of  examination  of  the  legality 
of  the  security  by  counsel  for  each  new  purchaser.  The  trust 
company,  however,  certifying  the  bond  as  to  its  genuineness,  should 
be  particular  to  assume  no  responsibility  as  to  its  validity.  A  con- 
venient place  of  registration  should  be  provided  in  the  chief  financial 
centres  of  the  country,  to  save  purchasers  the  inconvenience  and 
expense  of  forwarding  securities  to  the  place  of  issue  in  order  to 
obtain  registration  in  their  names.  The  payment  of  interest  should 
be  arranged  for  at  the  office  of  responsible  and  experienced  agents 
at  the  financial  centres,  affording  conveniences  to  investors  and  a 
safeguard  against  the  acceptance  of  fraudulent  coupons. 

It  has  been  abundantly  proved  by  experience  that  municipal 
bonds  advertised  as  being  issued  under  the  safeguards  outlined  are 
more  acceptable  to  the  investor  and  command  a  higher  price  at  pub- 
lic sale.  The  evidences  of  Federal  obligation  are  surrounded  with 
safeguards  in  issue  analagous  to  those  we  have  outlined.  Corpo- 
rations have  long  attained  the  same  result  in  the  issue  of  their  secu- 


TRUST  COMPANY  SECTION  507 

rities  through  the  instrumentality  of  the  trust  companies.  Municipal 
officials  are  beginning  to  realize  the  virtue  of  this  protection  in  the 
issue  of  their  bonds,  and  with  a  clearer  understanding  of  the  dangers 
involved  under  the  old  methods,  we  believe  that  the  hearty  co-oper- 
ation of  the  banker  may  be  relied  upon  for  the  better  protection  of 
the  great  interests  involved. 


THE  DUTIES  AND  LIABILITIES  OF  TRUST  COMPANIES 
ACTING  AS  TRANSFER  AGENTS  AND  REGISTRARS 

ADDRESS   DELIVERED   BY    HENRY  J.    BOWDOIX,  OF   BALTIMORE,   BEFORE  THE  AMERICAN 
BANKERS'    ASSOCIATION,    AT    RICHMOND,    VA.,    OCTOBER,     IOXK). 

The  office  of  transfer  agent  and  registrar  of  stock  is  an  interest- 
ing instance  of  the  operation  of  forces  which  may,  from  time  to 
time,  arise  in  the  business  world,  and,  becoming  operative,  produce 
their  effect  in  the  form  of  an  established  business  custom.  In  an- 
alogy, however,  to  the  physical  law  of  motion,  the  final  resultant 
of  such  forces,  the  established  business  custom  in  question  may, 
through  the  inertia  of  a  movement  once  started,  become  crystallized 
at  a  point  far  beyond  that  at  first  contemplated,  and  may  ultimately 
involve  legal  relations  and  responsibilities,  not  at  first  recognized, 
and  which  remain  undetermined  until  some  combination  of  circum- 
stances brings  the  established  custom  before  the  courts  for  inter- 
pretation. Until  the  statute  law  or  the  courts  have  so  defined  or 
interpreted  the  legal  responsibilities  incident  to  such  custom,  all 
transactions  within  its  scope  are  enshrouded  in  an  uncertainty  and 
doubt,  except  to  the  extent  to  which  light  may  be  thrown  by  the 
application  of  general  legal  principles. 

It  is  to  the  consideration  of  such  a  situation  that  I  now  invite 
your  attention  for  a  few  minutes — to  the  legal  and  business  ques- 
tions involved  in  the  position  of  a  trust  company  acting  as  the 
transfer  agenl  or  registrar  of  the  stock  of  another  corporation. 

An  effort  to  determine  the  primary  operative  reason  for  the  now 
almost  universal  custom  of  appointing  a  transfer  agenl  for  the 
Stocks    of   large    corporation,    is   of   interest    and    importance,   since 


508  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

such  reasons  arc  in  themselves  explanatory  of  the  purpose  and  in- 
tern of  those  who  enter  into  the  legal  relations  involved  in  the  office, 
and  are  also  evidence  of  the  purpose  of  those  who  have  operated 
in  such  office  or  position  in  the  expectation  that  the  discharge  of  the 
functions  of  the  office  would  meet  the  requirements  of  such  intent 
and  purpose.  I  have  not  been  able  to  determine  definitely  the 
causes  which  have  resulted  in  this  well-established  custom,  but  it  is 
reasonably  certain  that  it  is  the  evolution  of  a  process  of  thought 
and  reason  running  in  the  following  groove :  It  is  universally  es- 
tablished that  the  transfer  of  title  to  stock  is  not  complete  for  all 
purposes,  nor  properly  evidenced,  until  the  transferee  or  purchaser 
has  been  registered  as  stockholder  upon  the  books  of  the  corpora- 
tion. Such  registration  and  notation  of  transfer  can  be  performed 
by  the  selling  owner  in  person,  or  by  his  duly  authorized  attorney; 
and  we  all  know  that  the  latter  course  is  the  one  almost  universally 
adopted.  Business  convenience,  or  the  inexorable  demand  for  busi- 
ness facilities,  and  the  enormous  volume  of  stock  transferred,  then 
created  the  necessity  for  and  the  custom  of  appointing  an  agent, 
whose  sole  duty  it  was  to  attend  to  those  transfers,  perfect  them, 
complete  the  transaction  involved  in  the  purchase  and  sale  of  stock, 
and  furnish  the  evidence  of  such  completed  transaction  by  the  issue 
of  a  new  certificate  to  the  transferee.  Both  the  necessity  for  the 
office  and  its  importance  were,  of  course,  apparent.  Then,  doubt- 
less the  advisability  of  throwing  every  possible  safeguard  around 
the  issue  and  transfer  of  stock  being  equally  apparent,  the  advantage 
gained  by  increasing  the  difficulty  of  dishonest  combinations  be- 
tween the  officers  of  the  corporation,  through  an  increase  of  the 
number  of  persons  whose  complicity  would  be  essential  to  any  fraud, 
resulted  in  the  custom  of  selecting  a  corporate  agent,  a  trust  com- 
pany, and  appointing  it  the  transfer  agent.  The  capital  and  sur- 
plus of  this  transfer  agent  is  probably  in  excess  of  that  of  the  com- 
pany for  which  it  is  acting  as  such  agent ;  doubtless  the  trust 
company  is  so  selected  from  among  others  largely  because  of  its 
prominence,  financial  responsibility,  and  the  consequent  security 
which  it  offers  to  all  those  who  deal  with  it.  We  may  fairly  assume 
that  such  are  the  causes  which  were  creative  of  the  now  well-estab- 
lished custom  of  appointing  trust  companies  as  transfer  agents 
for  the  stocks  of  other  corporations. 


TRUST  COMPANY  SECTION  509 

Of  course,  we  all  know  that  the  security  which  was  sought  to 
be  gained  through  a  multiplicity  of  officers  whose  signatures  upon 
the  certificates  were  essential  to  their  validity  in  many  instances  no 
longer  exists  in  fact,  because  it  is  quite  customary  for  corporations 
to  have   large  numbers   of  their   certificates   of  stock  duly   signed, 
leaving  only  the  name  of  the  stockholder  and  the  number  of  shares 
blank,  and  intrusting  the  certificates  in  this  condition  in  the  hands 
of  the  transfer  agent.     Nevertheless,  the  fact  that  this  one  primary 
reason  for  the  establishment  of  the  office  has  in  this  manner  really 
ceased  to  exist  does  not  create  any  probability  of  the  ultimate  aban- 
donment of  the  custom.     The  other  reasons  for  its  creation  still  exist, 
and  the  continuance  of  the  custom   is  largely  insured  by  the  fact 
that  the  omission   of  a  transfer  agent  would  be  regarded  as   sus- 
picious and  irregular.     In  fact,  many  of  the  stock  exchanges  require 
the  appointment  of  a  transfer  agent,  as  a  condition  precedent  to  the 
placing  of  a  stock  upon  their  lists,   and  corporations  are  now  so 
eager  to  assume  all  indicia  of  caution  and   conservatism   that  we 
often  see  a  provision  placed  upon  the  face  of  the  certificate  to  the 
effect  that  the  certificate  is  not  valid  unless  signed  by  the  transfer 
agent.     In  several  instances   I  have   seen  this  provision  carried  to 
the  extent  of  requiring,  not  only  the  signature  of  the  transfer  agent, 
but  also  the  signature  of  the  registrar,  as  essential  to  the  validity  of 
the  certificate. 

The  office  of  transfer  agent  may  be  regarded  as  a  permanent  in- 
stitution ;  it  should  certainly  be  reckoned  with  as  such.  A  trust 
company  occupying  this  office  assumes  a  twofold  obligation ;  cer- 
tainly it  assumes  a  twofold  relation :  first,  to  the  corporation  for 
which  it  acts  as  agent,  which  we  will  designate  the  principal ;  and, 
second,  to  those  who  have  an  interest  in  the  stock  transferred. 

The  relation  between  the  agent  and  the  principal  is  usually  cre- 
ated by  a  resolution  of  the  board  of  the  latter  designating  the  com- 
pany as  transfer  agent,  accompanied  by  the  payment  of  an  agreed 
sum,  which  is  supposed  to  compensate  the  agent  for  the  clerical 
work  involved  in  making  transfers  during  the  succeeding  twelve 
months;  the  compensation  is  based  upon  the  anticipated  activity  of 
the  stock.  By  clear  implication  the  agent  holds  itself  out  as 
competent  to  discharge  the  duties  of  the  office.  What  are  those 
duties? 


510    PRACTICAL  PROBLEMS  IN  banking  and  currency 

Broadly  speaking,  the  agent  agrees  to  perform  for  the  principal 
the  work  of  passing  upon  the  evidence  of  transfer  of  title  to  the 
principal's  stock,  and  of  perfecting  such  transfers  as  are  in  proper 
shape  by  the  due  notation  of  the  transfer  and  the  issue  of  a  new 
certificate.  If  no  agent  were  appointed,  the  corporation  principal 
would  itself  perform  all  this  work,  and,  of  course,  all  the  liabilities 
incident  thereto,  would  rest  upon  it ;  and  such  was  the  case  until  the 
custom  and  office  in  question  were  created.  But  having  appointed 
such  agent,  what  measure  of  responsibility  to  the  principal  attaches 
to  the  agency,  and  is  impliedly  assumed  by  the  agent  in  accepting 
the  office? 

At  this  point  we  pass  beyond  the  circle  of  light  thrown  by  estab- 
lished law,  and  find  ourselves  involved  in  uncertainty  and  doubt. 
Is  the  relation  so  established  between  the  principal  and  agent  that 
of  simple  agency,  to  which  the  usual  law  of  such  relation  may  be 
applied  with  certainty,  and  the  liability  of  the  agent  may  be  con- 
sidered with  confidence  as  limited  to  the  consequences  of  lack  of 
good  faith  and  ordinary  skill,  competency,  and  knowledge?  Or 
must  the  duties  assumed  by  the  agent  be  so  performed  as  to  satisfy 
the  requirements  of  the  situation,  which  would  exist  if  no  agent 
had  been  appointed,  but  the  principal  had  remained  in  direct  touch 
with  its  stockholders,  and  without  the  interposition  of  any  inter- 
mediary? In  other  words,  must  the  agent  so  perform  its  duties 
as  fully  to  discharge  the  responsibility  which  the  principal  is  under 
to  its  stockholders  in  all  that  pertains  to  the  preservation  of  the 
stockholders'  interest  and  title,  until  such  interest  and  title  is  duly 
divested  and  transferred,  and  is  the  agent  responsible  for  all  con- 
sequences ensuing  to  the  principal  from  a  failure  so  to  perform  its 
duties? 

In  an  effort  to  reach  a  conclusion  upon  the  measure  of  re- 
sponsibility assumed,  it  should  be  borne  in  mind  that  the  creation 
of  the  office  is,  apparently  at  least,  due  to  pressure  rather  from 
without  than  from  within  the  corporation.  This  creation  is  not 
due  to  the  requirements  of  business  facilities  and  convenience  of  the 
corporation  in  perfecting  the  current  transfers  of  its  stock,  but  is 
due,  certainly  in  great  measure,  to  influences  outside  the  corporation 
to  a  demand  for  security  not  afforded  within  the  corporation's  own 
organization,   and   consequently   sought   for   outside   that  organiza- 


TRUST  COMPANY  SECTION  511 

tion,  through  a  separate  existence,  removed  as  far  as  possible  from 
the  influences  and  control  of  that  organization. 

The  decisions  of  record,  so  far  as  I  have  been  able  to  discover, 
are  upon  cases  where  there  was  some  gross  default  by  the  agent 
in  the  discharge  of  its  duties.  I  find  no  case  presented  involving  the 
liability  to  the  principal  when  due  care,  skill,  and  knowledge  were 
exercised,  nor  where  the  court  has  decided  what,  in  any  specific 
case,  would  constitute  due  care,  skill,  and  knowledge.  But  in  view 
of  the  causes  which  have  resulted  in  the  office  and  custom,  and  of 
the  practically  absolute  control  exercised  in  most  instances  by  the 
agent,  it  is  certainly  prudent  for  us  to  anticipate  that  the  courts  will 
decide,  when  a  proper  case  is  presented,  that  the  agent  is  respon- 
sible to  its  principal  in  the  full  measure  of  the  consequences  result- 
ing to  the  principal  for  any  acts  of  the  agent. 

The  degree  of  legal  liability  to  the  principal  may,  of  course,  be 
restricted  by  the  terms  of  any  agreement  entered  into  between  the 
principal  and  the  agent,  and  such  limitation  may  be  made  operative 
between  the  agent  and  those  interested  in  the  stock  transferred,  if 
the  latter  are  charged  with  legal  notice  of  the  restriction  upon  full 
liability ;  but  certainly  in  the  great  majority  of  instances  the  relation 
is  created  by  the  method  described ;  that  is,  by  a  resolution  of  the 
board  of  the  principal  designating  the  company  which  is  to  act  as 
transfer  agent,  and  the  tacit  acceptance  by  the  latter  of  the  duties  of 
the  office,  and  the  fee  agreed  upon.  Clearly  there  is  no  limitation 
of  liability  here — the  relation  is  left  charged  with  such  responsibili- 
ties as  the  court  may  decide  to  be  implied  in  the  transaction.  Can 
it  be  successfully  argued  that,  while  the  agent  agreed  to  perform 
the  work,  and  accepted  a  cash  consideration  therefor,  the  responsi- 
bility for  the  consequences  of  mistake,  however  innocent,  impliedly 
remains  where  it  formerly  rested,  upon  the  principal,  it  having 
parted  with  the  control  of  the  situation?     T  apprehend  not. 

Tf  such  be  the  conclusion  which  courts  will  reach,  we  are  con- 
fronted by  the  fact  that  the  many  legal  questions  and  difficulties 
involved  in  the  transfer  of  stock — questions  which  have  brought 
forth  volumes  of  legal  textbooks  and  decisions — are  presented  to 
the  agent,  or,  speaking  more  practically,  to  the*  knowledge  of  its 
transfer  clerk,  and  his  discretion  and  discrimination  in  determining 
what  questions  should  be  referred  to  counsel  for  solution  and  action. 


512  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

The  agent  must  not  do,  or  leave  undone,  any  matter  of  thing  what- 
soever by  which  its  principal  suffers  loss  directly,  or  by  which  it 
falls  under  liability  to  anyone  having  property  interest  in  its  stock 
by  reason  of  any  impairment  of  that  interest.  The  agent  must  see 
that  there  is  no  overissue  of  stock,  either  by  direct  fraudulent  act  of 
its  own  employees,  or  by  issue  of  new  certificates  upon  surrender 
of  old  ones  with  forged  indorsements,  or  by  permitting  an  unauthor- 
ized transfer  of  stock,  thereby  rendering  possible  the  fraudulent  loss 
to  innocent  parties,  even  if  unknown  and  practically  unknowable 
either  to  the  principal  or  the  agent.  The  agent  is  charged  with 
knowledge  of  the  signatures  of  the  stockholders  of  its  principal,  and 
with  the  legal  capacity  of  the  stockholder  to  transfer  his  stock.  For 
example,  in  the  case  of  Chew  vs.  Bank  (Maryland  292),  a  corporation 
was  held  liable  for  permitting  a  transfer  upon  the  genuine  signa- 
ture of  a  stockholder  who  had  become  non  compos,  a  fact  of  which 
the  defendant  was  in  complete  ignorance.  If  this  bank  had  been 
fortunate  enough  to  have  appointed  a  strong  trust  company  as 
transfer  agent,  and  this  stock  transfer  had  been  passed  by  its  agent, 
the  ultimate  liability  might  have  been  shifted.  Again,  the  agent 
is  charged  with  knowledge  of  the  terms  and  powers  under  which 
a  trustee  stockholder  acts,  it  having  been  decided  that  the  word 
"trustee"  on  a  certificate  of  stock  carries  with  it,  in  many  cases, 
responsibility  of  full  knowledge  of  the  powers  of  the  trustee  and 
the  terms  of  the  trust.  A  refusal  by  an  agent  to  transfer  stock  on 
demand  is  ground  for  suit,  unless  it  is  ultimately  decided  that  the 
refusal  was  based  upon  adequate  reasons,  or  upon  lack  of  proper 
evidence  of  the  right  to  demand  transfer. 

Of  course,  the  agent  is  responsible  to  its  principal  for  all  acts  of 
fraud  or  negligence  committed  by  the  agent,  or  by  anyone  in  its 
employ,  by  which  the  principal  suffers  loss  or  damage.  It  is  prac- 
tically impossible  for  the  higher  officers  of  the  agent  to  scrutinize 
every  transfer  or  to  keep  the  principal's  certificate  book  under  per- 
sonal guard,  so  that  many  opportunities  for  fraud  are  open  to  the 
agent's  clerk  having  charge  of  transfers  and  with  the  certificate 
book  of  the  principal,  signed  in  blank,  in  his  possession.  The  case 
of  Bank  of  Kentucky  vs.  Schuylkill  Bank  (1  Parson's  Select  Equity 
Cases  180)  is  instructive  as  being  a  leading  one;  and  one  of  the  few 
instances  in  which  the  legal  relations  which  we  are  considering  have 


TRUST  COMPANY  SECTION  513 

come  before  the  court  for  interpretation,  and  interesting  as  showing 
the  utter  disproportion  between  the  average  fee  of  the  transfer  agent 
and  the  financial   responsibility   assumed. 

This  was  a  bill  in  equity  in  1839,  brought  by  the  Bank  of  Ken- 
tucky, a  corporation  created  by  the  state  of  Kentucky,  against  the 
Schuylkill  Bank.  The  plaintiff  had  the  power  under  its  charter 
to  establish  transfer  agents  where  it  pleased,  which  power  was  ex- 
ercised, and  the  Schuylkill  Bank  was  appointed  its  transfer  agent 
in  Philadelphia,  on  a  salary  of  $500  per  annum.  The  bill  charged 
and  the  proof  showed  that  Levis,  cashier  of  the  defendant,  who 
had  charge  of  the  transfer  of  the  plaintiff's  stock,  made  a  fraudulent 
overissue  to  the  extent  of  about  $1,300,000.  The  bill  also  charged 
that  the  plaintiff  was  being  sued  by  some  of  the  holders  of  the 
spurious  stock,  and  that  it  had  purchased  some  of  the  said  stock 
in  the  hands  of  innocent  purchasers  without  notice,  and  that  it  was 
ready  to  do  the  like  in  all  such  cases.  The  plaintiff  further  claimed 
that,  by  virtue  of  an  act  of  assembly  of  the  state  of  Pennsylvania, 
it  represented  all  the  holders  of  said  stock.  It  asked,  among  other 
things,  for  an  accounting,  and  for  a  decree  against  the  defendant 
for  the  par  value  of  the  stock  thus  surreptitiously  issued,  with  in- 
terest thereon,  and  also  for  damages  sustained.  The  court  decreed 
that  the  defendant  pay  unto  the  plaintiff  $1,184,738  as  a  just  in- 
demnity for  the  loss,  detriment,  and  damages  to  which  the  plaintiff 
and  the  holders  of  the  stock  had  been  put  or  suffered  by  reason  of 
the  fraudulent  issue  of  13,185  shares  of  stock  of  the  plaintiff  by 
the  defendant  while  transfer  agent  of  the  plaintiff,  through  the 
knowledge,  procurement,  and  assistance  of  Levis.  In  reaching 
this  conclusion  the  court  used  the  following  language: 

What  is  a  transfer  agency?  Tt  is  a  very  harmless  thing.  It  amounts  to 
nothing  more  than  the  witnessing  of  the  conveyance  hy  one  person  to  another 
of  personal  property,  viz.,  stock  of  an  incorporated  company;  and  in  this  case, 
al  0,  to  furnishing  the  purchaser  a  certificate  of  ownership  of  such  stock,  on  the 
surrender  of  a  previous  certificate  of  like  character  held  by  the  seller. 

This  is  a  very  simple  business,  involving  little  or  no  risk  or  hazard ;  re- 
quiring nothing  hut  ordinary  care  and  fidelity  in  its  performance.  If  the 
necessities  of  one  hank  require  iis  stock  to  be  transferred  in  another  place, 
whether  in  the  state  of  if  creation  or  out  of  it,  why  cannot  it  ask  aid  of  a 
correspondent  hank  that  does  all  it-  Other  business  in  such  place?  And  why 
cannot  such  corn-  pondenl  hank  afford  the  aid  required?  In  the  charter  of 
the  Schuylkill  Bank  there  is  found  nothing  in  terms  forbidding  the  execu- 
33 


514  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

lion  of  such  a  friendly  office,  either  to  another  bank  of  our  own  or  of  a  sister- 
state.     (P.  217.) 

First,  it  is  contended  that  the  contract  for  this  agency  being  made  by 
the  president  and  directors  of  an  incorporated  bank,  it  became,  from  a  neces- 
sity equally  known  to  both  parties,  requisite  to  employ  the  assistance  of  sub- 
agents  in  its  execution ;  that  the  cashier  of  the  Schuylkill  Bank  was  the  sub- 
agent,  so  cJiosen  by  that  corporation  with  the  assent  and  approbation  of  the 
complainants;  that  all  the  frauds  charged  in  the  bill  were  perpetrated  by  him 
without  the  conusance  and  connivance  of  the  president;  and  that  under  such 
circumstances  the  bank  is  no  further  responsible  for  his  acts  than  arises  from 
the  general  obligation  of  every  principal  agent  to  act  with  good  faith  and  or- 
dinary care  in  the  selection  of  a  secondary  agent.  The  principle  on  which  this 
position  rests  is  the  familiar  one  that  when  it  is  usual  and  necessary  for  a  prin- 
cipal agent  to  employ  a  sub- agent,  as  for  example  a  broker  or  auctioneer,  to 
transact  the  business,  in  such  a  case  the  principal  agent  will  not  ordinarily  be 
held  responsible  for  the  negligence,  or  misconduct  of  the  sub-agent,  if  he  has 
used  reasonable  diligence  in  his  choice  as  to  the  skill  and  ability  of  the  sub-agent. 
But,  indisputable  as  is  this  principle,  it  has  no  relevancy  to  an  agency  like 
the  present.  The  cashier  of  a  bank,  while  carrying  into  execution,  under  the 
orders  of  the  directors,  a  lawful  contract,  such  as  the  contract  of  creating 
this  agency  is  shown  to  have  been,  is  in  no  sense  of  the  word  a  sub-agent 
of  the  board  of  directors.     (Pp.  239,  240.) 

In  fact,  when  the  business  of  the  agency  has  reached  that  point,  the 
principal  agent  is  not  an  agent  so  much  to  sell  as  to  select  on  behalf  of  his 
principal  someone  competent  to  execute  a  necessary  function  for  him,  which 
the  agent  cannot  perform  himself;  and  all  the  cases  referred  to  in  this  con- 
nection are  but  the  various  developments  of  this  common  principle.  But  was 
it  ever  heard  of  that  an  agent  charged  with  negligence  or  fraud  could  relieve 
himself  from  liability  to  his  principal  by  showing  that  his  clerk  or  porter 
were  the  immediate  actors  in  the  wrong  and  acted  without  his  authority? 
If  such  metaphysical  niceties  would  be  at  once  repudiated  in  a  natural 
person,  why  should  they  be  recognized  in  a  corporation?     (P.  241.) 

The  comments  of  the  court  upon  the  general  nature  of  the  rela- 
tion are,  I  take  it,  obiter  dicta,  and,  not  being  essential  to  the  con- 
clusion reached  by  the  court,  are  deprived  of  all  weight  as  prece- 
dent or  decision.  You  observe  that  in  this  case  the  defendant  was 
not  allowed  to  plead  its  due  diligence  and  care  in  selecting  its  cashier, 
but  was  held  to  full  accountability  to  its  principal.  I  can  find  no  suffi- 
cient reason  upon  which  to  base  a  theory  that  would  differentiate 
between  the  ultimate  responsibility  for  such  fraud  as  was  perpe- 
trated in  the  Kentucky  bank  case  and  the  ultimate  responsibility  for 
the  consequences  of  passing  a  forged  or  unauthorized  transfer, 
with  absolute  innocence  of  intent  upon  the  part  of  the  agent  and  its 
employees.     Let  us  assume  that  the  plaintiff  is  an  infant  who  has 


TRUST  COMPANY  SECTION  515 

been  injured  by  the  defalcation  of  its  trustee  in  transferring  stock; 
the  corporation  whose  stock  is  so  transferred  is  clearly  liable  (Mar- 
bury  vs.  Ehlen,  -J2  Aid.  206).  Is  not  the  agent  who  was  paid  by 
that  corporation  to  assume  for  it  the  duties  of  making  its  transfers 
liable  in  turn  to  that  corporation  for  the  consequences  of  an  im- 
proper performance  of  those  duties? 

The  decisions  upon  the  liability  of  the  transfer  agent  to  the  prin- 
cipal are  few  in  number;  the  direct  liability  of  the  transfer  agent 
to  the  injured  stockholder  has  apparently  not  been  before  a  court 
of  last  resort,  but  the  application  of  established  legal  principles  to 
the  latter  proposition  would  seem  to  fix  the  agent's  liability  to  the 
stockholder  as  completely  as  the  decisions  noted  established  the 
agent's  liability  to  its  principal,  and  we  reach  the  conclusion  that  the 
agent  must  answer  to  the  stockholder  for  all  damages  suffered  by 
the  former  through  such  illegal  or  unauthorized  transfers  for  which 
the  corporation  whose  stock  is  so  transferred  would  be  held  liable. 
The  stockholder's  case  against  the  agent  is  strengthened  by  a 
regulation  of  the  stock  exchange  requiring  the  appointment  of  a 
transfer  agent — for  such  requirement  is  in  the  nature  of  a  demanded 
'eguard  and  precaution  upon  which  the  stockholder  and  the  stock- 
trading  public  have  a  right  to  rely.  The  case  becomes  still  stronger 
if  the  certificate  contains  a  statement  or  notice  that  its  validity  is 
dependent  upon  the  signature  of  the  transfer  agent ;  for  in  that 
instance  such  certificate  gives  to  the  certificate  a  validity  and  credit 
which  it  would  not  have  unless  so  signed.  Such  stock-exchange 
requirements    for   listing,   and   such    provisions   on   the   face  of  the 

iificate,  would  seem  strongly  to  emphasize  the  responsibility 
which  the  agent  assumes  toward  its  principal  and  the  latter's  stock- 
holders. Apparently  the  injured  stockholder  could  successfully 
pursue  either  his  corporation,  the  principal,  or  the  agent,  or  both. 

At  the  second  annual  meeting  of  this  section  (August  24,  1898) 
an  able  paper  upon  this  general  subject  was  presented  by  Mr.  Felix 
Rackemann  a  counsel  of  the  Old  Colony  Trust  Company,  Boston, 
in  which  the  author  drew  a  distinction  between  the  legal  responsi- 
bilities of  a  transfer  agent  and  those  of  a  registrar  or  corpora  1 
securities,  considering  thai  the  latter  were  broader  than  the  former. 
He  places  the  origin  of  the  office  in  the  fraudulent  overissue  of  the 
stock  of  the    New   York  &  New   Haven    Railroad   Company  by  its 


5i6  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

president  and  transfer  agent,  the  transaction  being  known  as  the 
"Schuyler  Frauds."  (N.  Y.  &  N.  H.  Rd.  vs.  Schuyler,  34  N.  Y.  30.) 
This  occurrence  emphasized  the  necessity  of  further  safeguards 
around  the  issue  and  transfers  of  stock,  and  resulted  in  the  passage 
(in  January,  1869)  of  a  regulation  by  the  New  York  Stock  Ex- 
change under  the  terms  of  which  corporations  whose  stocks  are 
listed  are  required  to  appoint  a  responsible  agency  at  which  a 
registry  of  the  stock  shall  be  kept.  The  keeper  of  this  registry  is 
known  as  the  registrar.  The  sole  purpose  of  the  office  seems  to 
have  been  creation  of  another  check  against  overissue. 

The  appointment  is  made  by  resolution  of  the  board  of  the  ap- 
pointing company,  and  is  accompanied  by  the  payment  of  a  small 
cash  consideration,  gauged  by  the  degree  of  activity  with  which  it 
is  anticipated  the  stock  will  be  transferred  or  dealt  in.  The  trans- 
fer agent  makes  the  transfer,  issues  the  new  certificate  to  the 
transferee,  which,  together  with  the  old  certificate  and  such  separate 
powers  or  evidences  as  may  accompany  it,  are  sent  to  the  registrar 
and  duly  noted  upon  books  kept  for  that  purpose.  Since  the  func- 
tion to  be  performed  by  the  registrar,  which  it  holds  itself  out  as 
competent  to  discharge,  is  that  of  a  check  against  the  transfer 
agent  in  guarding  against  an  overissue  of  stock,  it  becomes  neces- 
sary for  the  registrar  to  scrutinize  all  transfers,  since  the  issue  of  a 
certificate,  except  against  one,  legally  canceled,  for  the  same  num- 
ber of  shares,  would  necessarily  result  in  an  overissue.  This  duty 
the  registrar  impliedly,  by  its  acceptance  of  the  office  and  fee,  agrees 
to  discharge. 

Obviously,  if  the  registrar  certifies  the  issuance  of  a  certificate, 
therebv  placing  upon  it  the  last  and  highest  indicia  of  validity,  and 
loss  results  to  the  principal  therefrom,  the  registrar  has  failed  to 
fulfill  the  purpose  of  its  appointment.  If,  by  such  action,  loss  inures 
to  a  stockholder  whose  property  rights  have  been  wrongfully  di- 
vested thereby,  cannot  such  stockholder  recover  from  the  regis- 
trar, the  signature  of  the  latter,  in  acceptance  and  approval  of  the 
evidences  of  the  transfer,  being  essential  to  the  transfer  and  being 
the  last  act  in  consummation  of  the  transaction  by  which  the 
stockholder  is  injured?  In  the  absence  of  an  expressed  agreement 
limiting  the  liability  of  the  registrar,  it  would  seem  that  the  accept- 
ance of  the  office  carries  an  acceptance  of  responsibility  for  failure 


TRUST  COMPANY  SECTION  517 

properly  to  perform  the  functions  of  the  office,  and  that,  unless  such 
limitation  of  liability  is  brought  to  the  knowledge  of  the  stockholder, 
and  of  those  who  may,  from  time  to  time,  become  such,  the  accept- 
ance of  the  office  would  also  imply  an  acceptance  of  responsibility 
for  all  acts  for  the  registrar  whereby  the  stockholder  is  wrongfully 
deprived  of  his  property  interest  in  the  stock.  Here  again  the  case 
against  the  registrar  is  strengthened  by  the  quite  customary  regula- 
tions of  stock  exchanges  requiring  the  signature  or  counter-signa- 
ture of  a  registrar  as  essential  to  the  validity  of  the  certificate.  The 
duties  and  liability  of  registrar  do  not,  in  my  opinion,  differ  in  any 
marked  degree  from  those  of  a  transfer  agent. 

It  has  been  suggested  that  in  case  of  difficulty  or  doubt,  the  re- 
sponsibility of  decision  should  be  thrown  by  the  agent  or  registrar 
upon  the  principal,  and  definite  instructions  asked  for.  This  re- 
quest would,  if  answered,  relieve  the  agent  from  liability  to  the 
principal.  It  would  certainly  be  evidence  that  the  agent  considered 
itself  liable  only  for  the  usual  responsibility  of  an  agent;  but  I 
doubt  the  practical  value  of  the  suggestion,  because  the  request  for 
instructions  by  the  agent  would  probably  not  meet  with  any  satis- 
factory response.  I  have,  in  representing  a  transfer  agent,  asked 
the  principal  for  instructions,  and  to  my  surprise  received  them. 
I  anticipated,  however,  at  the  time  that  the  principal's  reply  would 
practically  be :  ''You  have  been  paid  to  perform  the  work  of  noting 
our  transfers,  and  have,  by  acceptance  of  your  fee,  agreed  to  decide 
these  questions  yourself  and  assume  the  consequences  of  an  errone- 
ous decision ;  therefore  we  decline  to  instruct  you  and  thereby  re- 
assume  the  ultimate  consequences  of  mistake  in  the  law  or  facts. 
Your  signature  is  essential  to  the  validity  of  the  new  certificates, 
and  you  put  it  on  or  refuse  it  at  your  peril,  not  ours."  Such  posi- 
tion would  be  difficult  to  assail,  and  I  am  strongly  inclined  to  the 
belief  that  such  would  be  my  position  if,  representing  the  principal, 
I  were  applied  to  $<>r  instructions  by  a  transfer  agent  or  registrar. 

Tt  may  be  that  the  weight  of  ultimate  decisions  by  the  courts, 
when  the  responsibilities  of  these  offices  have  been  presented  for  de- 
termination, will  result  in  the  application  of  the  general  rule  gov- 
erning the  relation  of  principal  and  agent,  and  in  holding  the  agent 
responsible  only  for  the  consequences  of  due  care,  skill,  and  knowl- 
edge, and   in   establishing  that   such  measure   of  responsibility  only 


Sl8  PRACTICAL  PROBLEMS  IN  HANKING  AND  CURRENCY 

attaches  to  or  is  implied  by  the  assumption  of  the  office.  But  if 
such  is  the  case,  it  remains  true  that  the  questions  which  may  arise 
in  the  transfer  of  stocks  are  most  obscure  and  involved,  and  that 
the  assumption  of  the  skill  and  knowledge  requisite  to  discharge 
the  duty  of  passing  upon  such  questions  is  a  dangerous  duty  for 
any  corporation  to  assume.  The  responsibility  of  passing  on 
transfers  is  one  of  the  most  important  duties  devolving  upon  the 
counsel  of  any  corporation.  As  the  number  of  corporations  for 
which  a  trust  company  acts  as  transfer  agent  or  registrar  increases, 
the  weight  of  its  responsibility  as  such  agent,  even  under  the  usual 
limitations  of  an  agent's  liability,  also  increases  through  multiplica- 
tion of  the  chances  of  innocent  error  and  mistake,  in  proportions 
which  it  is  not  pleasant  to  contemplate. 

It  would  seem  here  that  a  point  has  been  reached  when  trust 
companies  may,  with  possible  advantage,  pause  to  investigate  and 
consider  carefully  the  degree  of  liability  which  we  so  readily  assume 
in  accepting  the  position  of  transfer  agent  and  registrar,  and,  this 
being  determined,  to  see  if  the  scale  of  fees  is  commensurate  with 
that  responsibility.  Evidently  the  primary  operative  causes  have 
resulted  in  the  creation  of  an  office  which  involves  more  liability 
than  would,  at  first  sight,  have  been  supposed  to  attach  thereto. 
Possibly  the  nomenclature  of  these  offices — "agent,"  one  who  acts 
for  another,  and  '"registrar,"  one  who  performs  the  act  of  register- 
ing— has  obscured  the  true  relation  and  has  created  a  feeling  of 
confidence  which  is  misplaced.  Certainly  it  is  anomalous  that  the 
extreme  care  and  ingenuity  which  have  been  displayed  in  expressly 
limiting  the  liability  of  the  trustee  in  the  discharge  of  the  trust 
under  a  corporate  mortgage,  nowhere  appears  in  restricting  the 
responsibility  in  making  transfers  of  stocks  in  transactions  involv- 
ing untold  amounts.  If  the  degree  of  responsibility  is  that  which 
I  have  indicated,  and  the  legal  relation  is  not  that  of  agent  and 
principal,  that  nomenclature  being  misleading,  but  is  that  of  em- 
ployer and  employee,  the  transfer  agent  having  assumed  for  a  cash 
consideration  all  the  responsibilities  incident  to  the  proper  perform- 
ance of  the  work,  both  to  the  body  corporate  so  employing  and 
to  its  individual  members — those  interested  in  its  stock — is  not  the 
average  of  fees  paid  for  such  work  entirely  incommensurate  with 
the  risk,  even  applying  as  a  standard  the  rate  of  premium  charged 


TRUST  COMPANY  SECTION  519 

by  bonding  companies  under  the  existing  conditions  of  unbridled 
competition?  It  would  seem  to  be  scarcely  commensurate  with  the 
responsibility  assumed,  even  if  the  liability  is  only  to  exercise  due 
care,   skill,  and  knowledge  in  such  transactions. 

If  my  views  are  correct,  we  are  now  engaged  in  the  cheapest 
form  of  insurance  ever  devised.  It  is  good  business  for  the  average 
corporation  to  employ  a  strong  trust  company  to  make  its  transfers, 
and,  for  a  few  hundred  dollars'  premium,  assume  the  risks  of  de- 
falcation and  innocent  error.  Of  course,  the  large  majority  of 
transfers  are  in  usual  course  of  stock-exchange  business,  and  pre- 
sent no  new  or  novel  conditions,  and  only  those  in  which  statute 
or  established  decisions  furnish  a  safe  guide ;  but  we  may  be  at 
any  moment  called  out  of  the  beaten  path  and  confronted  with 
facts,  essential  and  with  but  little  to  indicate  their  existence,  to 
which  the  well-known  legal  principles  and  customary  procedure 
may  or  may  not  apply,  and  upon  the  decision  to  transfer  or  not 
transfer  may  depend  a  possible  heavy  loss. 

In  presenting  these  views  I  am  conscious  of  occupying  the  un- 
comfortable but  relatively  easy  position  of  a  critic  of  existing  condi- 
tions who  is  unprepared  to  suggest  an  adequate  remedy.  If,  how- 
ever, the  matter  receives  your  consideration  and  that  of  your  counsel, 
some  system  will  doubtless  be  devised  by  which  the  degree  of  lia- 
bility which  we  are  willing  to  assume  will  be  defined  and  properly 
evidenced,  or  a  scale  of  fees  will  be  established  which  fairly  repre- 
sents the  responsibilities  assumed,  if  they  are  determined,  or  the 
risks  involved,  if  the  responsibilities  of  the  office  remain  undeter- 
mined. 


520    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

THE  PROTECTION  OF  TRUST  COMPANIES  AS 
TRANSFER  AGENTS  AND  REGISTRARS 

ADDRESS    DELIVERED    BY    JORDAN    J.    ROLLINS,    OF   THE    NEW    YORK    BAR,   BEFORE   THE 
AMERICAN    BANKERS'    ASSOCIATION,    AT    NEW     YORK,    SEPTEMBER,     IQO4. 

The  functions  of  transfer  agents  and  registrars  of  corporate 
securities  are  not  discharged  to  any  great  extent  by  corporations  in 
the  United  States  outside  of  the  larger  cities.  Nevertheless,  the 
subject  of  the  obligations  and  liabilities  incurred  by  corporations  in 
the  assumption  of  those  duties  is  probably  of  interest  to  all  represen- 
tatives of  trust  companies  wherever  organized,  and  has,  no  doubt, 
been  the  subject  of  earnest  thought  on  the  part  of  each  of  those 
representatives.  Therefore,  it  is  to  be  hoped  that  a  consideration 
of  how  the  trust  company  may  best  be  protected  in  the  discharge  of 
the  important  duties  of  those  two  offices  will  prove  of  common  inter- 
est to  you  all,  even  though  that  consideration  in  large  part  dwells 
upon  conditions  as  they  obtain  in  the  state  where  you  have  now  met. 
What  is  true  of  the  law  of  New  York,  or  the  lack  of  it,  as  regards 
authoritative  adjudications  upon  the  subject  which  we  propose  to 
discuss,  is  likewise  applicable  to  other  parts  of  the  country,  subject 
only  to  slight  changes  or  modifications ;  for,  as  will  be  seen,  the 
necessity  for  the  corporate  transfer  agent  or  registrar,  and  the 
special  fitness  of  the  trust  company  to  act  in  those  capacities,  are 
natural  consequences  of  general  business  methods,  and  not  of  mere 
local  custom. 

The  New  York  Stock  Exchange  lays  down  the  rule  that :  "Cor- 
porations whose  shares  are  admitted  to  dealings  upon  the  exchange 
will  be  required  to  maintain  a  transfer  agency  and  a  registry  office 
in  the  City  of  New  York,  Borough  of  Manhattan." 

Both  the  Stock  Exchange  and  the  Legislature  seem  to  have  taken 
it  for  granted  that  the  duties  and  liabilities  of  a  transfer  agent  and 
of  a  registrar  were  so  perfectly  understood  as  to  need  no  definition 
or  regulation.  But  a  careful  investigation  of  the  subject  leads  to 
the  conviction  that  those  duties  and  liabilities  have  never  been  clearly 
fixed  or  determined,  either  by  authority  or  custom.  While  each 
particular  instance  of  transfer  agency  is,  like  any  other  agency, 
created  by  the  contract  between  principal  and  agent,  that  contract 
is  generally  in  substance  a  mere  resolution  by  the  board  of  directors 
of  the   principal    company  that   some  other   company   act    in   that 


TRUST  COMPANY  SECTION  521 

capacity,  and  the  assumption  of  the  work  by  the  designated  company, 
in  pursuance  of  such  resolution.  The  appointment  of  the  registrar 
is  effected  in  much  the  same  way.  The  contracts  thus  created  are, 
therefore,  peculiarly  open  to  variation  in  judicial  interpretation  by 
the  inclusion  of  implied  provisions.  The  result  is  that  trust  com- 
panies find  themselves  to-day  engaged  in  a  large  and  growing  branch 
of  business,  the  conditions  of  which  are  not  plainly  denned  and  are 
to  be  determined  only  by  a  careful  consideration  of  the  elements 
which  have  combined  to  create  independent  transfer  agency  and 
registry  and  make  them  corporate  functions. 

While  you  all  know  and  understand  the  obligations  of  a  company 
to  its  stockholders  regarding  the  transfer  of  the  certificates  of  its 
stock,  it  may  not  be  amiss,  in  approaching  the  question  before  us— 
the  due  protection  of  a  trust  company  in  acting  as  transfer  agent  and 
registrar  of  another  corporation — to  direct  your  attention  to  a  few 
cases  in  which  the  disastrous  consequences  that  have  befallen  cor- 
porations through  the  improper  transfer  of  their  certificates  are 
clearly  set  forth.  These  cases  have  been  chosen  with  the  purpose  of 
showing  that  liability  can  arise  equally  through  honest  mistake, 
negligence,  or  fraud.  In  each  instance,  it  is  gratifying  to  note,  they 
had  their  origin,  not  in  the  employment  of  a  corporate  transfer  agent, 
but  in  the  acts  of  officers  of  the  issuing  company. 

A  wrongful  transfer  may  occur,  for  example,  through  a  mistake 
of  fact  where  the  title  to  stock  is  affected  by  some  law  peculiar  to  a 
foreign  state  or  country  or  by  some  complicated  contractual  rela- 
tion. A  case  passed  in  review  by  the  Court  of  Appeals  of  New 
York  in  1901  (Central  Trust  Co.  v.  W.  India  Imp.  Co.,  169  N.  Y. 
314),  where  title  to  stock  was  subject  to  questions  arising  both  from 
peculiar  foreign  law  and  contractual  complications,  affords  a  strik- 
ing illustration  of  the  uncertainty  which  may  attend  the  task  of 
transferring  stock  of  a  foreign  corporation. 

The  West  India  Improvement  Company,  which  was  a  New  York 
corporation,  mortgaged  all  property  then  owned  or  thereafter 
acquired  by  it  to  the  Central  Trust  Company,  for  the  benefit  of  bond- 
holders. Subsequently,  the  Improvement  Company  became  the 
owner  of  the  stock  of  the  Jamaica  Railway  Company,  a  corporation 
organized  under  the  laws  of  Jamaica,  but  instead  of  delivering  the 
certificates  so  acquired  to  the  Central  Trust  Company  pursuant  to 


522  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

the  terms  of  the  mortgage,  pledged  them  with  the  Manhattan  Trust 
Company  as  security  for  loans  evidenced  by  notes.     "Subsequently, 

as  found  by  the  referee the  legal  title  to  the  shares  of  stock 

was  transferred  to  the  defendant,  the  Manhattan  Trust  Company." 
(by  this  the  referee  probably  meant  that  the  record  of  transfer  was 
made  on  the  railway  company's  books  at  Jamaica,  or  wherever  they 
were  kept.) 

The  Central  Trust  Company  afterwards  learned  of  the  pledge 
of  the  stock  to  the  Manhattan  Trust  Company,  and  immediately 
brought  an  action  seeking  to  have  the  stock  declared  subject  to  the 
mortgage  as  a  prior  and  superior  lien,  the  certificates  delivered  to  it, 
and  the  West  India  Improvement  Company  and  the  Manhattan  Trust 
Company  enjoined  from  making  any  sale  or  disposition  of  them. 
The  court  said  in  the  course  of  its  opinion : 

"At  the  time  the  Improvement  Company  made  the  assignment  to 
the  Manhattan  Trust  Company,  it  delivered  to  that  company  the 
certificates  of  stock  (which  then  stood  in  its  own  name)  with  trans- 
fers and  powers  of  attorney  endorsed  on  the  certificates  and  executed 
by  the  assignor.  If  the  railway  company  had  been  a  domestic  cor- 
poration and  the  transfer  of  its  stock  subject  to  the  law  which  pre- 
vails in  this  state,  it  is  clear  that  by  the  delivery  of  such  certificates 
and  transfers  the  Manhattan  Trust  Company  would  have  acquired 
the  legal  title  to  the  stock,  as  against  every  one  except  the  railway 
company,  and  being  a  purchaser  in  good  faith,  for  value,  to  the 
amount  of  the  notes  which  were  discounted  for  cash,  would  have 
held  it  free  from  any  lien  or  claim  of  the  plaintiff."  ' 

The  court  then  proceeded  to  discuss  the  finding  by  the  referee 
that  by  the  law  of  Jamaica  the  legal  title  to  the  capital  stock  of  the 
railway  company,  as  between  the  Improvement  Company  and  the 
Manhattan  Trust  Company,  could  pass  only  by  deed  of  transfer  and 
did  not  pass  by  the  delivery  of  certificates  with  transfers  in  blank 
duly  endorsed  thereon,  and  proceeded  as  follows : 

"Certificates  of  stock  are  neither  choses  in  action  nor  negotiable 
instruments ;  but  both  in  England  and  in  this  country  it  has  been 
sought  to  render  dealings  in  stocks  practicable  and  to  secure  the 
rights  of  purchasers  by  giving  to  stock  certificates  attributes  of 
negotiability  to  a  certain  limited  extent.  So  the  rule  is  settled  in 
England  that  a  purchaser  in  good  faith  without  notice  who  succeeds 


TRUST  COMPANY  SECTION 


523 


in  obtaining  his  transfer  to  be  first  registered  holds  his  stock  free 
from  the  equities  of  other  persons. 

"If  the  instruments  which  the  Manhattan  Trust  Company 
obtained  from  the  Improvement  Company  before  the  advance  of  the 
money  on  the  notes,  were  sufficient  to  enable  the  Trust  Company  by 
its  own  act  or  at  its  own  volition  to  acquire  a  legal  title  to  the  stock, 
then  upon  such  transfer  on  the  books  of  the  railway  company  the 
title  of  the  Trust  Company  became  indefeasible." 

But  the  court  did  not  attempt  to  decide  whether  in  fact  the  title 
was  indefeasible,  as  a  new  trial  was  necessary  in  any  event. 

In  a  case  in  the  United  States  Circuit  Court  (Masurn  v.  Arkan- 
sas, 87  Fed.  Rep.  38;  citing  Hammond  v.  Hastings,  134  U.  S.  401, 
and  other  cases),  it  appeared  that  certain  stock  of  an  Arkansas  cor- 
poration had  been  pledged  in  New  York.  Under  the  New  York 
law  the  pledge  would  have  been  good,  but  under  the  Arkansas  law 
its  validity  was  doubtful.     The  court  stated : 

"Whatever  the  general  principles  of  international  law  in  rela- 
tion to  assignments  of  personal  claims  may  be,  the  validity  of  a 
transfer  of  stock  is  governed  by  the  law  of  the  place  where  the  cor- 
poration is  created." 

Although  the  liability  of  the  issuing  corporation  was  not  in  ques- 
tion in  either  of  the  cases  just  cited,  it  clearly  follows  from  the  rule 
laid  down  in  each  that  ignorance  or  disregard  of  the  law  of  a  foreign 
state  or  country  may  result  in  wrongful  or  invalid  transfer  of  stock 
there  created.  In  such  cases  the  issuing  corporation  would  be  liable 
for  the  consequences. 

In  a  case  decided  by  the  Supreme  Court  of  the  United  States  in 
1887,  it  appeared  that  stock  standing  in  the  name  of  A  was  trans- 
ferred upon  an  assignment  purporting  to  have  been  made  by  A 
through  B  as  her  attorney.  The  corporation  knew  that  B  had  there- 
tofore acted  as  the  representative  of  A  and  did  not  require  from  him 
any  clear  proof  that  he  was  authorized  to  effect  the  particular  trans- 
fer, honestly  believing  from  his  representations  that  he  was  so  author- 
jzed.  The  proof  not  being  sufficient  to  establish  agency  as  a  fact, 
the  court  wa-  of  the  opinion  that  the  issuing  corporation  was  liable 
to  reimburse  the  stockholders  for  the  loss  occasioned  by  its  mistake 
in  permitting  the  transaction. 

As  will  be  seen,  this  was  a  case  where  the  negligence  rendering 


524  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

the  issuing  corporation  liable  consisted  merely  in  the  failure  on  the 
part  of  some  one  of  its  officials  to  investigate  beyond  question  the 
authority  of  the  apparent  agent  of  the  stockholder  to  transfer  stock 
for  that  stockholder. 

Mistake  and  actual  negligence,  however,  seem  to  have  been  rare 
in  the  transfer  of  stock,  and  most  of  the  cases  where  the  issuing 
company  has  been  subject  to  liability  in  connection  with  the  acts  of 
its  transfer  agent  have  arisen  from  fraud  on  the  part  of  persons  so 
employed.  Of  these  cases  the  Schuyler  frauds,  which  took  place  in 
1853  and  1854,  are  the  most  notable,  not  only  because  of  the  extent 
of  their  consequences,  but  because  in  the  enormous  litigation  which 
followed,  the  liability  of  the  issuing  corporation  for  the  acts  of  the 
transfer  agent  was  fully  discussed  and  definitely  settled. 

The  New  York  &  New  Haven  Railroad  had  $3,000,000  capital, 
represented  by  30,000  shares  of  stock.  Schuyler,  who  was  president 
of  the  company  and  its  transfer  agent,  issued  and  disposed  of  addi- 
tional certificates,  falsely  purporting  to  represent  stock  to  the  amount 
of  $2,000,000,  or  20,000  shares.  The  result  was  a  protracted  litiga- 
tion, in  which  the  holders  of  the  overissue,  more  than  300  in  number, 
were  finally  in  a  single  action  joined  against  the  company.  In  the 
report  of  the  proceedings  in  1858,  before  the  Court  of  Appeals,  their 
various  claims  are  described  as  follows: 

"They  all  claim  rights  against  the  company :  some  that  they  are 
stockholders ;  others  that  they  are  either  stockholders  or  have  a  right 
of  action  against  the  company  for  their  losses.  Some  claim  damages 
to  the  full  nominal  par  value  of  the  certificates  they  hold ;  others  for 
the  money  they  have  actually  advanced ;  while  all  assert  a  claim  upon 
the  company  in  some  form." 

After  some  years  the  case  reached  the  Court  of  Appeals  again, 
where  it  was  finally  held,  in  1865,  that  a  corporation  is  liable  to  the 
same  extent  and  under  the  same  circumstances  as  a  natural  person 
for  the  acts  and  for  the  negligence  of  its  agent  while  engaged  in  the 
business  of  his  agency,  and  that  neither  the  fact  that  the  agent  was 
acting  outside  the  terms  of  his  actual  authority,  nor  the  fact  that 
the  stock  so  issued  was  void,  nor  that  the  company  itself  had  no 
power  to  issue  that  amount  of  stock,  was  any  defense  to  the  claims  of 
the  holders,  because  the  company  had  put  its  agent  in  a  position  to 
perpetrate  the  fraud  while  seeming  to  act  within  the  scope  of  his 


TRUST  COMPANY  SECTION  525 

authority.  (Mechanics'  Bank  v.  New  York  &  New  Haven  R.  R. 
Co.,  13  N.  Y.  599;  New  York  &  New  Haven  R.  R.  Co.  v.  Schuyler, 
17  N.  Y.  30;  New  York  &  New  Haven  R.  R.  Co.  v.  Schuyler, 
Cross  and  325  others,  17  N.  Y.  594.) 

The  responsibility  of  the  issuing  company  for  the  due  registra- 
tion and  transfer  of  its  own  stock,  as  illustrated  by  the  cases  I  have 
quoted,  is  briefly  stated  in  the  words  of  the  United  States  Supreme 
Court,  in  another  case,  as  follows : 

"The  officers  of  the  company  are  the  custodians  of  its  stock 
books,  and  it  is  their  duty  to  see  that  all  transfers  of  shares  are 
properly  made,  either  by  the  stockholders  themselves  or  persons  hav- 
ing authority  from  them.  If  upon  the  presentation  of  a  certificate 
for  transfer  they  are  at  all  doubtful  of  the  identity  of  the  party  offer- 
ing it  with  its  owner,  or  if  not  satisfied  of  the  genuineness  of  a  power 
of  attorney  produced,  they  can  require  the  identity  of  the  party  in 
the  one  case,  and  the  genuineness  of  the  document  in  the  other,  to  be 
satisfactorily  established  before  allowing  the  transfer  to  be  made. 
In  either  case  they  must  act  upon  their  own  responsibility.  In  many 
instances  they  may  be  misled  without  any  fault  of  their  own,  just  as 
the  most  careful  person  may  sometimes  be  induced  to  purchase 
property  from  one  who  has  no  title,  and  who  may  perhaps  have 
acquired  its  possession  by  force  or  larceny.  Neither  the  absence  of 
blame  on  the  part  of  the  officers  of  the  company  in  allowing  an 
unauthorized  transfer  of  stock,  nor  the  good  faith  of  the  purchaser 
of  stolen  property,  will  avail  as  an  answer  to  the  demand  of  the  true 
owner.** 

The  limit  of  the  liability  thus  described  by  the  United  States 
Supreme  Court  is  nicely  determined  in  a  decision  of  the  Supreme 
Court  of  Massachusetts.  In  that  case  an  executor  pledged  stock 
of  the  estate  which  he  represented,  as  collateral  for  a  loan  to  another. 
The  Old  Colony  Railroad,  the  corporation  which  issued  the  stoi 
after  ascertaining  that  the  executor  had  absolute  power  of  sale. 
recorded  the  transfer  and  issued  a  new  certificate  in  the  name  of  the 
bank  making  the  loan.  On  default  in  the  payment  of  the  note,  the 
brink  sold  the  stock  at  auction.  (Telegraph  Company  v.  Davenport, 
97  U.  S.  369,  ai  p.  371  :  <  Tocker  v.  Old  Colony  R.  R.  Co..  137  Mass. 
417.)  In  an  action  subsequently  broughl  to  compel  the  railroad 
company  to  issue  a  new  certificate  for  the  benefit  of  the  estate,  it  was 


5_-o     PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

held  that,  although  the  act  of  the  executor  in  transferring  the  stock 
as  he  did  was  fraudulent,  the  corporation  was  not  bound  to  look 
beyond  the  power  of  transfer  in  order  to  find  out  the  purpose  for 
which  the  transfer  was  made. 

The  court  said  in  part:  "When  a  transfer  of  stock  is  presented  to 
a  corporation,  it  is  bound  at  its  peril  to  see  that  it  is  a  genuine  trans- 
fer by  one  who  has  power  of  disposition  over  the  stock."  And  cit- 
ing several  Massachusetts  cases  on  that  point,  the  court  continued: 
"If  it  issues  a  certificate  upon  a  forged  or  unauthorized  transfer, 
the  real  owner  retains  his  property  in  the  stock  and  the  corporation 
may  be  liable  to  a  bona  fide  holder  of  the  new  certificate.  But  when 
a  transfer  by  one  who  has  full  power  to  transfer  is  presented,  the 
corporation  has  the  right  to  act  upon  it,  and  it  is  not  its  duty  to 
inquire  into  the  purposes  of  the  parties  or  to  investigate  the  question 
whether  the  transfer  is  in  good  faith  or  is  fraudulent." 

On  the  ground  that  it  was  not  material  to  the  issue,  the  court 
declined  to  discuss  the  question  whether  or  not  the  corporation  would 
have  been  liable  had  it  possessed  actual  knowledge  of  the  fraudulent 
purpose  of  the  transfer,  but  from  the  other  decisions  which  I  have 
already  cited,  there  is  little  doubt  that  that  fact  would  have  rendered 
it  responsible  for  the  loss. 

On  the  other  hand,  to  quote  again  from  the  Massachusetts 
Supreme  Court,  in  the  same  case:  "If  a  proper  transfer  is  presented 
to  a  corporation,  it  is  its  duty  to  issue  a  new  certificate  in  accordance 
with  it,  and  if  it  refuses,  it  is  liable  to  the  person  to  whom  the  trans- 
fer is  made."     (Crocker  v.  Old  Colony  R.  R.,  137  Mass.  417.) 

These  cases  serve  to  illustrate  the  liability  of  the  issuing  corpora- 
tion. For  all  loss  occasioned,  whether  by  fraud,  negligence,  or 
unavoidable  mistake,  by  it  or  its  agents  in  the  transfer  of  its  stocks, 
such  corporation  is  absolutely  liable  and  no  excuse  can  mitigate  its 
liability. 

How  much  of  this  responsibility  attaches  to  the  registrar  and 
transfer  agent,  when  they  are  separate  corporations?  While  the 
officers  of  some  companies  which  act  as  registrars  undoubtedly 
believe  that  the  responsibilities  connected  with  the  discharge  of  the 
office  are  not  so  great  as  are  those  of  a  transfer  agent,  that  opinion 
is  probably  not  generally  held.  According  to  the  practice  in  New 
York,  at  least,  a  registrar  seldom  requires  more  than  the  exhibition 


TRUST  COMPANY  SECTION  527 

of  a  canceled  certificate  of  stock  for  a  given  number  of  shares  and 
the  presentation  therewith,  either  by  the  issuing  corporation  or  by 
its  transfer  agent,  of  a  new  certificate  for  the  same  number  of  shares 
in  the  name  of  the  transferee  of  the  canceled  certificate.  There- 
upon the  registrar  signs  the  new  certificate  without  requiring  other 
evidence  of  the  correctness  of  the  transfer.  Now  if,  as  a  fact,  the 
transfer  agent  has  been  induced  to  cancel  the  old  certificate  and  to 
issue  the  new  by  a  forged  or  otherwise  invalid  transfer,  the  stock 
does  not  follow  the  new  certificate.  In  other  words,  the  new  cer- 
tificate represents  no  stock.  The  countersignature  of  the  registrar, 
which,  in  effect,  certifies  to  the  public  that  the  certificate  upon  which 
it  appears  does  not  represent  an  overissue,  would,  therefore,  in  such 
cases  be  false  and  might  be  held  to  constitute  grounds  for  a  suit  for 
damages. 

This  possibility  is  clearly  brought  out  by  an  opinion  dealing  with 
the  relation  existing  between  a  corporation  and  its  transfer  agent. 
(Fifth  Ave.  Bank  v.  42d  St.  and  Grand  St.  Ferry  Co.,  137  N.  Y. 
231.)  The  plaintiff"  in  the  case  made  a  loan  secured  by  the  pledge 
of  a  certificate  of  stock.  It  developed  that  the  secretary  of  the 
defendant  company,  who  was  also  its  treasurer  and  transfer  agent, 
had  forged  the  president's  name  to  the  stock  certificate,  and  in  his 
own  official  capacity  had  signed  and  countersigned  the  certificate 
and  finally  delivered  it  to  his  partner  for  the  purpose  of  obtaining 
money  for  the  firm.  The  issuing  corporation  refused  to  treat  the 
certificate  as  valid,  but  was  held  liable  therefor  in  an  action  for 
damages,  at  the  suit  of  an  innocent  holder  for  value. 

The  court  said:  "This  result  follows  from  the  application  of  the 
fundamental  rules  which  determine  the  obligations  of  a  principal 
for  the  acts  of  his  agent.  They  are  embraced  in  the  comprehensive 
statement  of  Story  in  his  work  on  Agency  (9th  ed.,  Sec.  452),  that 
the  principal  is  to  be  'held  liable  to  third  persons  in  a  civil  suit  for 
the  fraud-,  deceits,  concealments,  misrepresentations,  torts,  negli- 
gences and  other  malfeasances  or  misfeasances  and  omissions  of 
duty  of  his  agent  in  the  course  of  his  employment.'" 

Again — "It  is  true  that  the  secretary  and  transfer  agent  had  no 
authority  to  issue  a  certificate  of  stock  except  upon  the  surrender 
and  cancellation  of  a  previously  existing  valid  certificate,  and  the 
signature  of  the  presidenl   and  treasurer  were  first  obtained  to  the 


528  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

certificate  to  be  issued;  but  those  were  facts  necessarily  and  pecu- 
liarly within  the  knowledge  of  the  secretary,  and  the  issue  of  the 
certificate  in  due  form  was  a  misrepresentation  by  the  secretary  and 
transfer  agent  that  these  conditions  had  been  complied  with  and  that 
the  facts  existed  upon  which  his  right  to  act  depended.  It  was  a 
certificate  apparently  made  in  the  course  of  his  employment  as  agent 
of  the  company  and  within  the  scope  of  the  general  authority  con- 
ferred upon  him,  and  the  defendant  is  under  an  implied  obligation  to 
make  indemnity  for  the  loss  sustained  by  the  negligent  or  wrongful 
exercise  by  its  officers  of  the  general  powers  conferred  upon  them." 

The  court  further  said :  ''The  in  testimonium  clause  asserted  that 
the  defendant  had  caused  that  particular  certificate  to  be  signed  by 
its  president  and  countersigned  by  its  treasurer  and  transfer  agent 
and  sealed  with  its  corporate  seal  February  6,  1885.  It  is  very  clear 
that  under  the  regulations  adopted  by  the  defendant,  and  pursuing 
the  mode  of  procedure  which  it  had  prescribed,  the  final  act  in  the 
issue  of  a  certificate  of  stock  was  performed  by  its  secretary  and 
transfer  agent,  and  that  when  he  countersigned  it  and  affixed  the 
corporate  seal  and  delivered  it  with  the  intent  that  it  might  be 
negotiated,  it  must  be  regarded  so  long  as  it  remained  outstanding 
as  a  continuing  affirmation  by  the  defendant  that  it  had  been  law- 
fully issued  and  that  all  the  conditions  precedent  upon  which  the 
right  to  issue  it  depended  had  been  duly  observed.  Such  is  the  effect 
necessarily  implied  in  the  act  of  countersigning.  This  word  has  a 
well  defined  meaning  both  in  law  and  the  lexicon.  To  countersign 
an  instrument  is  to  sign  what  has  already  been  signed  by  a  superior 
to  authenticate  by  an  additional  signature,  and  usually  has  reference 
to  the  signature  of  a  subordinate  in  addition  to  that  of  his  superior, 
by  way  of  authentication  of  the  execution  of  the  writing  to  which  it 
is  affixed,  and  it  denotes  the  complete  execution  of  the  paper."  (Cit- 
ing Worcester's  Dictionary.)  "When,  therefore,  the  defendant's 
secretary  and  transfer  agent  countersigned  and  sealed  this  certificate 
and  put  it  in  circulation  he  declared  in  the  most  formal  manner  that 
it  had  been  properly  executed  by  the  defendant  and  that  every  essen- 
tial requirement  of  law  and  of  the  by-laws  had  been  performed  to 
make  it  the  binding  act  of  the  company." 

In  tins  case,  it  is  true,  the  action  was  brought  against  the  corpor- 
ate principal  and  the  question  before  the  court  was  not  that  of  the 


TRUST  COMPANY  SECTION  529 

liability  of  the  officer  in  countersigning.  While,  therefore,  the 
language  of  the  decision  cannot  be  taken  as  authority  on  the  latter 
subject,  it  conveys  a  warning  that  in  countersigning  a  certificate  a 
registrar  does  rather  more  than  certify  the  due  formality  of  execu- 
tion, and  at  least  suggests  that  the  registrar,  in  addition  to  the  issu- 
ing company,  would  be  liable  for  any  damage  that  might  be  occa- 
sioned thereby. 

Let  us  now  proceed  to  consider  the  liability  of  a  trust  company 
acting  as  transfer  agent. 

In  the  first  place,  the  position  of  the  issuing  corporation  to  the 
stockholder  differs  essentially  from  that  of  the  agent  to  the  principal. 
The  corporation,  by  its  contact  with  its  stockholders,  grants  them 
certain  absolute  rights  which  cannot  be  affected  by  the  fraud,  negli- 
gence, or  mistake  of  its  agents.  The  agent,  on  the  other  hand, 
promises  the  principal  that  it  will  do  a  certain  thing,  and  this  prom- 
ise the  general  law  of  agency  qualifies  by  confining  it  within  the 
limits  of  ordinary  human  prudence  and  ability,  unless  express  pro- 
visions to  the  contrary  are  contained  in  the  contract  itself.  The 
transfer  agent  must,  of  course,  follow  the  instructions  of  its  princi- 
pal loyally,  in  good  faith,  and  with  reasonable  care  and  diligence. 

Loyalty  and  good  faith  need  no  definition,  while  the  care  and 
diligence  required  by  law  from  an  agent  in  the  discharge  of  his 
agency  has  been  stated  by  the  courts  to  be  — "the  same  degree  of  care 
that  men  of  ordinary  prudence  exercise  in  regard  to  their  own 
affairs,"  and  so  it  has  been  held,  in  a  case  just  decided  in  the  highest 
court  of  this  state,  with  regard  to  directors  of  moneyed  corporations 
in  performing  corporate  business. 

Under  these  general  rules  of  agency,  the  responsibility  from 
which  the  trust  company,  acting  as  registrar  and  transfer  agent, 
relieves  the  issuing  corporation  is  apparent.  The  trust  company 
assumes  the  task  of  providing  and  supervising  men  of  integrity  and 
ability  to  perform  the  duties  of  registration  and  transfer,  and  the 
liability  for  loss  resulting  from  the  actual  negligence  or  dishonesty 
of  its  employees.  If  Schuyler,  for  example,  had  been  the  officer  of 
a  trust  company  acting  as  transfer  agent,  that  trust  company  would 
in  all  probability  have  been  held  liable  to  the  New  York  &  New 
Haven  Railroad  for  all  the  loss  occasioned  by  his  acts,  and  the  rail- 
road company  would  have  lost  nothing,  had  the  assets  of  the  trust 
34 


530  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

company  been  sufficient  to  meet  the  liability.     Moreover,  the  chance 
is  small  that  in  such  an  event  the  loss  would  have  occurred. 

Transfer  agency  is  a  part  of  the  regular  business  of  the  trust 
company — a  specialty  in  which  it  has  constant  practice  and  over  the 
details  of  which  and  the  men  engaged  therein  it  must  exercise  active 
and  intelligent  supervision.  In  short,  the  trust  company  has  skill, 
practice,  and  system ;  its  temptation  to  do  right  is  greater  than  its 
temptation  to  do  wrong;  it  is  financially  responsible  and  cannot 
escape  the  jurisdiction.  The  law,  too,  has  hedged  it  with  safeguards 
in  its  own  interest  and  the  interest  of  its  clients.  (Hanna  v.  Lyon, 
179  N.  Y.  107.) 

It  would  seem  that  these  conditions  sufficiently  meet  the  needs  for 
which  corporate  transfer  agents  were  required ;  but  apparently  a 
doubt  has  somehow  arisen  that  their  liability  is  bounded  by  the  law 
of  agency,  and  it  has  been  suggested  that  they  are  saddled  with  the 
whole  responsibility  of  the  issuing  company  to  its  stockholders, 
involving  the  duty  of  absolute  infallibility,  and  liability  for  the  con- 
sequences of  any  mistake,  however  unavoidable,  and  in  spite  of  the 
exercise  of  any  degree  of  care  and  diligence. 

On  two  occasions1  there  have  been  read  before  this  section  of  the 
American  Bankers'  Association  papers  upon  the  duties  and  responsi- 
bilities of  a  trust  company  acting  as  registrar  and  transfer  agent. 
The  earlier  of  them  argued  that  the  liability  involved  in  the  discharge 
of  the  functions  of  the  transfer  agent  was  measured  by  its  negli- 
gence, but  that  in  the  capacity  of  registrar  the  liability  was  not  so 
limited.  The  later  paper,  avowedly  prompted  by  the  earlier  one, 
urged  that  the  measure  of  liability  was  the  same  in  each  of  the  two 
representative  positions,  and  that  the  liability  extended  beyond  that 
of  the  ordinary  agent ;  in  other  words,  that  the  contract  between  the 
trust  company  and  the  issuing  company  is,  in  effect,  that  the  trust 
company  will  save  the  issuing  company  harmless  from  all  improper 
issues  and  transfers,  whether  the  exercise  of  the  utmost  care  would 
have  prevented  the  mistake  or  not.  Whether  this  guaranty  was 
confined  to  the  company  whose  stock  or  bonds  were  the  subject  of 
transfer,  or  extended  to  the  lawful  owners  of  the  securities,  was  not 
definitely  stated  by  the  author  of  the  article ;  but  it  was  evidently  his 
opinion  that  should  the  courts  be  called  upon  to  deal  with  the  ques- 
^he  first  paper  was  presented  by  Felix  Rackemann,  of  Boston,  August, 
1898.    The  latter  will  be  found  on  page  507  of  this  volume. 


TRUST  COMPANY  SECTION  531 

tion,  they  might  well  hold  a  transfer  agent  liable  to  persons  inter- 
ested in  the  stock  or  bonds  for  any  injury  sustained  through  an 
improper  transfer  or  registration.  This  opinion  drew  forth  obser- 
vations from  representatives  of  trust  companies  indicating  that  their 
views  of  the  responsibilities  assumed  by  trust  companies  acting  in 
either  capacity  had  been  correctly  voiced  in  the  article. 

While  every  member  of  the  bar  who  has  given  to  these  questions 
any  consideration  must  have  definite  views  as  to  the  principles  of 
law  applicable  to  the  duties  of  the  office  and  the  measure  of  respon- 
sibility involved  therein,  any  attempt  by  me  to  justify  the  conclusions 
reached  in  either  of  the  papers  referred  to  would  be  idle  at  this  time. 
But  reflections  upon  the  method  by  which  trust  companies  can  be 
adequately  protected  in  acting  in  either  capacity,  reflections  sug- 
gested by  the  diversity  of  views  entertained  by  the  two  able  writers 
of  those  papers,  may  be  of  present  value. 

The  object  of  the  usual  rule  that  stock  "shall  be  transferable  only 
upon  the  books  of  the  corporation,"  was  and  is  simply  to  settle  the 
ownership  of  stock  beyond  dispute  by  putting  in  the  hands  of  stock- 
holders and  the  corporation  accurate  and  authoritative  evidence  of 
title,  somewhat  like  that  which  the  law  has  created  in  the  case  of 
land,  the  portable  evidence  being  supplied  by  the  stock  certificates 
as  by  the  deed,  and  the  record  by  the  stock  books  as  by  the  books  of 
the  register  of  deeds.  Further,  owing  to  the  relation  between  the 
stockholders  and  the  corporation,  involving  the  right  to  vote  and 
receive  dividends,  it  was  deemed  wise  that  stockholders  should  not 
be  permitted  to  bind  the  corporation  by  independent  transfer,  how- 
ever they  might  bind  themselves.  From  these  causes  arose  the  need 
of  the  formal  transfer,  the  surrender  to  the  corporation  of  the  old 
certificate,  the  issue  by  the  corporation  of  the  new  certificate,  and 
the  entry  of  the  transaction  upon  the  corporate  books. 

Originally  these  details  of  transfer  were  treated  as  mere  inci- 
dents to  the  business  of  the  corporation  whose  stock  was  to  be  trans- 
ferred, and,  as  such,  were  performed  by  one  or  other  of  its  officers 
or  employees,  discharging  other  duties  as  well.  Now  in  many 
instances  this  portion  of  a  company's  business  is  entrusted  to  another 
corporation,  though  this  is  not  in  any  case  necessary,  provided  there 
be  an  independent  registrar.  TJie  old  by-law  of  the  Stock  Exchange 
providing  "The  Stock  Exchange  will  not  call  or  deal  in  any  active 


532    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

speculative  stock  of  any  company,  a  registry  of  whose  stock  is  not 
kept  in  some  responsible  bank,  trust  company,  or  other  satisfactory 
agency,"  while  it  suggests  banks  and  trust  companies  as  proper 
registrars,  does  not  necessarily  prohibit  a  corporation  from  keeping 
its  own  transfer  agency,  nor  does  the  article  of  the  constitution  of  the 
Stock  Exchange,  by  which  the  old  provision  is  superseded ;  namely : 
"Corporations  whose  shares  are  admitted  to  dealings  upon  the 
exchange  will  be  required  to  maintain  a  transfer  agency  and  a 
registry  office  in  the  City  of  New  York,  Borough  of  Manhattan;" 
and:  "Both  the  transfer  agency  and  the  registrar  must  be  acceptable 
to  the  committee  on  stock  list,  and  the  registrar  must  file  with  the 
secretary  of  the  exchange  an  agreement  to  comply  with  the  require- 
ments of  the  exchange  in  regard  to  registration."  (Old  by-laws  of 
New  York  Stock  Exchange,  Art.  IV.,  superseded  by  present  consti- 
tution, Art.  XXXIII.) 

It  therefore  seems  fair  to  assume  that  the  reason  for  the  general 
adoption  of  independent  corporate  transfer  agents  is  the  purely 
natural  one  before  suggested ;  namely,  the  additional  security  to  the 
issuing  corporation  and  its  stockholders  which  comes  from  the 
services  of  a  responsible  agent  making  this  most  important  function 
a  recognized  part  of  its  regular  business,  over  that  afforded  by  the 
old  system  with  its  burden  of  detail  and  risk.  Trust  companies  are 
by  the  law  of  New  York,  and  of  other  states  as  well,  specifically 
authorized  to  act  as  transfer  agents  and  registrars. 

From  this  brief  review  of  the  situation  of  issuing  companies  as 
regards  the  transfer  of  their  stock,  the  probable  origin  of  the  office 
of  independent  corporate  transfer  agency  and  registry,  and  the 
diverse  theories  of  the  obligations  and  liabilities  assumed  by  a  trust 
company  in  acting  in  each  capacity,  we  are  naturally  led  to  consider 
the  protection  of  the  trust  company  from  the  viewpoint  of  those 
believing  in  the  greatest  measure  of  liability.  Assuming,  then,  for 
the  purpose  of  our  discussion,  the  twofold  nature  of  the  obligation 
imposed  upon  trust  companies  acting  as  transfer  agents ;  namely, 
their  liability  as  agents  for  negligence  and  fraud,  and  the  greater 
liability,  amounting  to  insurance,  to  appreciate  more  clearly  what  it 
involves,  let  us  consider  a  specific  instance  of  the  obligation. 

Take  the  case  of  the  United  States  Steel  Corporation,  with  its 
enormous  capital  stock  of  $1,100,000,000,  of  which  $508,302,500  of 


TRUST  COMPANY  SECTION 


533 


common  stock  and  $360,140,000  of  preferred  stock  are  outstanding. 
The  Hudson  Trust  Company  was  specifically  organized  to  act  as 
the  transfer  agent  of  all  the  stock ;  the  New  York  Security  &  Trust 
Company  was  designated  the  registrar  of  its  preferred  stock,  and 
the  Guaranty  Trust  Company  of  its  common  stock.  Now,  if  the 
real  obligation  assumed  by  these  three  trust  companies  is  what  we 
have  assumed  for  the  purpose  of  argument,  there  would  be  a  con- 
tingent liability  thereby  created  for  no  less  an  amount  than  $868,442,- 
500,  the  sum  total  of  the  outstanding  stock,  the  validity  of  which  the 
Hudson  Trust  Company  as  transfer  agent,  and  the  New  York  Secu- 
rity &  Trust  Company  and  the  Guaranty  Trust  Company,  as  regis- 
trars have  insured;  subject,  of  course,  to  abatement  through  fluctua- 
tion in  the  market  value  of  the  securities,  and,  in  the  last  analysis,  a 
contingent  liability  not  even  limited  by  the  stupendous  sum  repre- 
sented by  those  securities. 

There  is  no  trust  company  that  we  know  of  which  could  legally  as- 
sume such  an  enormous  liability  on  a  single  risk.  As  is  well  known, 
depositors  and  beneficiaries  whose  funds  are  entrusted  to  trust  com- 
panies are  jealously  protected  by  statutory  safeguards.  Only  approved 
investments  are  authorized,  and  the  legal  reserve  must  be  faithfully 
maintained.  To  incur,  therefore,  in  a  single  transaction,  such  an  in- 
surance liability,  is  obviously  a  clear  violation  of  all  principles  of  busi- 
ness and  legal  prudence,  which  have  persistently  aimed  at  the  largest 
security  for  the  public  consistent  with  sound  banking  methods.  By 
the  law  of  New  York  there  is  only  one  class  of  corporations  author- 
ized to  assume  such  an  insurance  risk,  namely,  insurance  companies. 

Casualty  insurance  companies  may  guarantee  "the  performance 
of  contracts  other  than  insurance  policies,"  and  may  guarantee  "the 
validity  and  legality  of  bonds  issued  by  .  .  .  any  private  or  public 
corporation."  (Gen.  Laws  of  New  York  Insurance,  Sec.  70.) 
Moreover,  along  with  the  authority  so  conferred,  the  insurance  law- 
imposes  stringent  limitations,  quite  distinct  from  those  to  which  trust 
companies  are  subjected.  For  the  protection  of  the  insured  and  the 
general  public,  it  is  provided  that  no  single  risk  shall  be  taken  by  an 
insurance  company  in  an  amount  exceeding  one-tenth  of  its  capital 
stock  and  surplus,  excepl  where  it  is  secured  by  collateral,  which,  of 
course,  by  so  much  lessens  the  actual  risk.  (Gen.  Laws  of  New 
York,  Insurance,  Sec.  24.) 


534 


PRACTICAL  PROBLEMS  IN  RANKING  AND  CURRENCY 


It  would  seem,  therefore,  that,  reverting-  to  our  illustration  and 
proceeding  on  our  assumption  of  the  theory  of  insurance  or  guaranty, 
the  Hudson  Trust  Company,  the  New  York  Security  &  Trust  Com- 
pany, and  the  Guaranty  Trust  Company,  in  undertaking  to  act  as 
transfer  agent  and  registrars  respectively  of  the  United  States  Steel 
Corporation,  violated  the  letter  or  the  spirit  of  the  insurance  law,  for 
the  capital  and"  surplus  of  the  Hudson  Trust  Company  (a  corpora- 
tion organized  under  the  laws  of  New  Jersey,  where  there  is  a 
similar  statute  limiting  the  amount  of  authorized  insurance)  is  only 
$1,440,075.71 ;  of  the  New  York  Security  &  Trust  Company,  only 
$12,239,945.70;  and  of  the  Guaranty  Trust  Company,  only  $7,125,- 
856.99,  making  in  the  aggregate  $20,805,877.40,  or  about  one-forty- 
second  of  the  amount  of  the  par  value  of  the  securities  of  the  Steel 
Corporation.  If  to  the  ordinary  liability  as  agents  proper,  for 
negligence  and  misconduct,  trust  companies  so  acting  have  assumed 
the  extraordinary  liability  of  insurance  or  guaranty,  the  possible 
beneficiaries  thereof  are  substantially  the  issuing  corporations  or  the 
general  investing  public,  as  represented  by  the  Stock  Exchange. 
Now  it  cannot  be  conceived  that  either  the  investing  public,  the 
Stock  Exchange,  or  the  issuing  corporations  can  be  well  protected, 
if  at  all,  by  the  assumption  by  trust  companies  of  this  extraordinary 
liability  of  guaranty,  which,  in  the  case  of  every  large  issuing  cor- 
poration, not  only  violates  the  insurance  law,  but  by  subjecting  the 
entire  capital  of  the  company  to  the  hazard  of  a  single  risk,  runs 
counter  to  all  principles  of  ordinary  business  prudence  as  well. 

The  interest  of  the  issuing  company  remains  to  be  considered. 
It  is,  of  course,  liable,  in  any  event,  to  those  interested  in  its  stock 
who  may  be  injured  by  its  own  acts  or  those  of  its  corporate  transfer 
agent  or  registrar.  The  trust  company  is  appointed  by  and  receives 
its  compensation  from  the  issuing  corporation.  It  would  be 
appropriate,  therefore,  in  a  proper  case,  for  the  issuing  corporation 
to  insure  itself  in  a  responsible  company  in  a  manner  provided  by 
law,  against  claims  to  be  made  against  it  on  the  ground  of  the  inva- 
lidity of  the  stock,  bonds,  or  other  securities  it  assumes  to  issue. 
Whether  we  consider  the  proper  function  of  a  trust  company,  which 
is  not  that  of  insurance,  or  the  measure  of  the  compensation  received 
for  acting  as  transfer  agent  or  registrar,  which  bears  no  relation  to 
the  insurance  risk,  it  results  that  an  issuing  corporation  should  seek 


TRUST  COMPANY  SECTION  535 

such  security,  not  from  the  trust  company,  but  from  a  company 
authorized  and  equipped  to  write  insurance,  and  properly  paid  there- 
for. 

Having  considered  the  possible  results  of  an  insurance  obligation 
on  the  part  of  trust  companies  occupying  such  relations,  and  demon- 
strated, it  is  believed,  the  undesirability  of  such  a  status,  the  question 
that  confronts  us  is  whether  the  situation  admits  of  remedy.  An 
obvious  but  doubtful  solution  would  be  the  separation  of  the  respon- 
sibility, giving  to  trust  companies  ordinary  liability  for  their  own 
negligence  or  fraud,  and  to  insurance  companies  the  extraordinary 
hazard  incident  upon  insurance.  It  is  believed,  however,  that  the 
trust  companies  have  answered  the  purpose  of  registrars  and  trans- 
fer agents  so  well  that  there  would  be  no  disposition  on  the  part  of 
the  issuing  corporations  to  incur  additional  expense  in  procuring 
insurance  from  insurance  companies.  A  solution  based  upon  such 
a  separation  of  functions  would,  therefore,  probably  prove  imprac- 
ticable. 

When  the  ingenuity  of  business  is  unequal  to  the  task  of  avoiding 
an  oppressive  liability  imposed  by  law,  it  is  usual  to  find  the  solution 
where  logically  it  belongs — in  the  change  of  the  unsound  law.  If, 
then,  this  insurance  liability  attaches  to  the  contract  entered  into 
between  trust  companies  and  the  issuing  corporations,  for  the  benefit 
of  the  issuing  corporations  or  the  public  at  large,  and,  in  fact,  is  a 
responsibility  which  the  trust  companies  are  neither  authorized  by 
law  to  assume  nor  justified  by  business  sagacity  in  incurring,  and 
for  which  the  trust  company  is  not  compensated ;  and  further,  if  this 
extraordinary  liability  of  the  trust  company  results  in  only  illusory 
security  to  the  issuing  corporations  and  the  public  at  large,  it  must 
surely  follow  that  every  interest  involved  should  seek  relief  in 
changing  the  law,  which  is  seemingly  to  the  present  advantage  of 
nobody,  and  which  is  therefore  unreasonable.  It  would  seem  that 
the  necessary  legislation  could  be  readily  obtained.  Its  sole  purpose 
would  be  to  clarify  the  legal  relation  of  trust  companies  when  acting 
as  transfer  agents  or  registrars,  a  relation  that  at  present  is  confess- 
edly  and  dangerously  obscure.  Not  a  single  interest  could  possibly 
be  injured  thereby.  The  liability  of  the  issuing  company  to  all 
interested  in  its  stock  would  remain  as  at  present,  while  the  trust 
company  in  the  capacity  of  transfer  agent  or  registrar  would  be 


536  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

relieved  from  any  liability  save  for  the  negligence  or  willfully  wrong- 
ful acts  of  its  officers,  cither  in  connection  with  the  stock,  bonds,  or 
other  certificates  of  indebtedness  of  the  principal  corporation,  or  in 
the  selection  or  continued  employment  of  incompetent  clerks.  Such 
a  law  would  not  impose  upon  the  issuing  corporation  any  other  or 
different  liabilities  or  obligations  from  those  to  which  it  would  be 
subject  should  it  act  as  its  own  transfer  agent  or  have  as  its 
registrars  individual  employees ;  but  would  permit  them  to  be 
relieved,  as  now,  from  a  vast  amount  of  clerical  detail.  Moreover, 
they  would  be  assured  that  the  transfers  of  their  stock  would  rest  in 
the  hands  of  those  peculiarly  competent,  from  large  and  continuous 
experience,  to  throw  every  safeguard  around  the  transfers,  and 
would  be  relieved  from  the  onerous  responsibility  of  constant  and 
active  supervision. 

By  Section  156  of  the  banking  law  of  New  York,  trust  companies 
are  empowered  to  "act,  as  the  fiscal  or  transfer  agent  of  any  state, 
municipality,  body  politic,  or  corporation;  and  in  such  capacity  to 
receive  and  disburse  money,  to  transfer,  register  and  countersign 
certificates  of  stock,  bonds  or  other  evidences  of  indebtedness,  and  to 
act  as  agent  of  any  corporation,  foreign  or  domestic,  for  any  lawful 
purpose."  I  would  propose,  as  an  amended  statute,  which  I  believe 
would  achieve  the  desired  result,  a  law  of  the  following  character : 

"Section  156.  Powers  of  Corporation.  Upon  the  filing  of  any 
such  certificate  of  authorization  of  a  trust  company,  the  persons 
named  therein  and  their  successors  shall  thereupon  and  thereby 
become  a  corporation,  which,  in  addition  to  the  powers  conferred  by 
the  general  and  stock  corporation  laws,  shall  have  power — 

"1.  To  transfer,  register,  and  countersign  certificates  of  stock, 
bonds,  and  other  evidences  of  indebtedness  of  corporations,  with 
liability  to  such  corporations  and  to  the  owners  or  holders  of  such 
certificates  of  stock,  bonds,  or  other  evidences  of  indebtedness,  solely 
for  the  negligence  or  willful  misconduct  of  its  officers  in  reference 
to  such  certificates  of  stock,  bonds,  or  other  evidences  of  indebted- 
ness, or  in  the  appointment  or  employment  of  its  agents,  clerks,  or 
employees  dealing  therewith. 

"2.     To  act  as  the  fiscal  or  transfer  agent  of  any  State,  munici- 
pality, or  body  politic." 

There  should,   in  my  opinion,  also   be   an  additional  provision 


TRUST  COMPANY  SECTION  537 

making  the  limitation  of  liability  apply  to  existing  trust  companies, 
whether  incorporated  under  general  laws  or  special  acts.  There 
seems  no  reason  why  a  like  modification  of  corporate  transfer  liability 
may  not  be  accomplished  in  other  states  in  much  the  same  manner. 


POWERS  OF  FIDUCIARIES  OUTSIDE  THE  STATE  OF 
THEIR   APPOINTMENT 

ADDRESS  DELIVERED  BY  FREDERICK  VIERLING,  TRUST  OFFICER  OF  THE  MISSISSIPPI 
VALLEY  TRUST  COMPANY,  ST.  LOUIS,  BEFORE  THE  AMERICAN  BANKERS'  AS- 
SOCIATION,   AT    MILWAUKEE,    OCTOBER,    1901. 

In  this  paper  the  consideration  of  the  question  indicated  in  the 
title  will  be  limited,  relating  only  to  express  trusts  legally  created 
and  not  contravening  the  law  against  perpetuities  and  duly  ac- 
cepted by  the  fiduciary ;  the  discussion  not  touching  in  any  way  the 
many  points  of  difference  arising  out  of  implied  trusts  and  illegal 
trusts,  so  called,  or  matters  of  agency. 

We  are  all  familiar  with  the  character  of  the  different  kinds 
of  trusts  and  the  offices  of  fiduciaries  known  as  executor  and  ad- 
ministrator, guardian  or  curator,  receiver,  assignee,  and  trustee. 
As  a  general  rule,  all  natural  persons  capable  of  confidence  and  of 
taking  and  holding  either  the  legal  title  or  a  beneficial  interest  in 
property  may  hold  it  in  trust  for  others ;  and  corporations  may 
hold  property  and  execute  trusts  where  this  power  is  within  the  scope 
of  their  corporate  existence,  such  as  trust  companies,  which  are 
given  comprehensive  powers  to  execute  trusts  of  every  description. 

The  subject  naturally  divides  itself  into  the  following  three 
points  of  discussion,  to  wit: 

1.  Where  the  fiduciary  is  the  natural  person  and  the  trust  com- 
pany is  created:  (a)  by  act  of  the  parties  such  as  trusteeships  and 
assignments;  and  (h)  where  the  trust  is  created  by  appointment 
of  the  various  courts  under  the  law  having  jurisdiction  in  the  prem- 
i  such  as  guardianships  and  curatorships,  receiverships,  adminis- 
trations, and  executorships,  the  latter  being  under  probated  wills 
nominating  an  executor,  who  is  appointed  by  the  court  to  execute 


53§  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

the  will,  and  deriving  his  powers  from  both  the  will  and  the  law; 

2.  Where  the  fiduciary  is  a  corporation  authorized  by  law  to 
accept  and  execute  trusts ;    and 

3.  Where  the  property  of  the  trust  is  personalty  and  where 
it  is  real  estate. 

It  is  one  of  the  attributes  of  the  ownership  of  property  that  the 
owner  has  power  to  dispose  of  it  as  he  chooses,  so  long  as  he  does 
not  trespass  on  the  rights  of  others  or  act  in  a  way  contrary  to  law. 
It  is  a  well-established  right,  among  others,  that  the  owner  may 
by  a  conveyance  in  trust  create  a  trust  of  his  property  for  the  vari- 
ous purposes  with  which  we  are  familiar,  to  take  effect  during  his 
lifetime;  or  by  will  he  may  create  a  trust  independent  of  the  duties 
of  his  executor,  to  take  effect  after  his  death.  Either  of  the  trusts 
so  created  is  by  act  of  parties,  and  the  trustee  has  all  the  powers  over 
the  trust  property  that  may  be  delegated  to  him  by  the  owner,  and 
the  power  of  the  trustee  over  the  trust  property  in  another  stale 
is  the  same  as  in  the  state  where  the  trustee  resides.  Under  our 
national  Constitution  the  citizens  of  each  state  are  entitled  to  all 
the  privileges  and  immunities  of  citizens  in  the  several  states ;  and 
under  this  provision  a  citizen  of  one  state  may  acquire,  own,  and 
dispose  of  property  in  another  state  just  as  can  a  citizen  resident 
in  that  other  state ;  and  our  national  Supreme  Court  has  repeatedly 
decided  that  this  provision  applies  equally  where  the  property  is 
conveyed  to  a  non-resident  trustee  in  trust. 

Another  fiduciary  relation  created  by  act  of  party  is  where  a 
debtor  assigns  all  his  property  for  the  benefit  of  his  creditors.  As 
a  general  rule,  the  assignee  need  not  be  a  resident  of  the  state  where 
the  property  is  situate,  and  takes  the  title  to  all  property  of  his  as- 
signor wherever  found ;  the  assignee  becomes  the  legal  owner  of 
the  property  and  has  the  same  power  and  control  over  it  as  if  he 
were  the  absolute  owner.  This  general  rule  must  be  qualified,  as 
where  the  laws  of  the  foreign  state  where  some  of  the  property  is 
provide  for  statutory  assignments  only,  thus  prohibiting  general 
assignments  other  than  statutory ;  in  such  ca^es  the  general  as- 
signee cannot  assume  charge  of  the  property  in  the  foreign  state 
without  complying  with  the  statutory  requirements  and  conditions, 
and  if  the  assignee  must  be  a  resident  he  cannot  obtain  recognition 
at  all.     Assignments  are  still  permitted  under  the  state  laws,  though 


TRUST  COMPANY  SECTION 


539 


under  the  national  bankruptcy  act  an  assignment  is  an  act  of  bank- 
ruptcy, and  the  debtor's  matters  on  application  of  any  person  in- 
terested will  be  taken  charge  of  by  the  bankruptcy  court  and  the 
assignee  be  ousted.  Questions  relating  to  assignments  therefore 
are  no  longer  of  greatest  importance. 

Where  the  fiduciary  is  appointed  by  the  various  courts  under 
the  law  having  jurisdiction,  as  trusts  for  minors  and  insane  persons, 
receiverships  and  administrations,  the  appointment  in  contempla- 
tion of  law  is  not  by  voluntary  act  of  party.  These  are  instances 
where  the  courts  step  in  and  appoint  legal  representatives  for 
owners  to  protect  their  property  interests,  where  they  themselves 
have  no  legal  capacity,  as  guardians  or  curators ;  or  where  there 
is  danger  of  waste  and  the  conflicting  interests  are  involved,  as 
receivers ;  or  where  the  owner  is  dead,  as  administrators  and  ex- 
ecutors. In  law  these  legal  representatives  are  considered  officers 
of  the  courts,  and,  as  these  courts  have  complete  jurisdiction  only 
in  their  own  states,  they  can  give  their  officers  no  greater  terri- 
torial power  than  their  own,  and  the  appointment  of  such  officers 
has  no  effect  on  property  beyond  the  territorial  limits  of  the  state 
in  which  the  appointment  is  made.  (In  some  of  the  states  citizens 
of  another  state  may  be  appointed,  and  in  such  cases  the  foreign 
representative  has  the  same  powers  as  a  citizen  of  that  state  would 
have  if  appointed.)  The  general  rule  is  modified  to  some  extent, 
as  follows : 

As  to  administrators  and  executors,  by  the  principle  that  they, 
as  such,  are  the  legal  representatives  of  the  deceased  owner  in 
control  of  all  his  property  and  may  collect  assets  in  a  foreign  juris- 
diction if  payment  or  delivery  is  made  to  him  voluntarily,  so  that 
resort  to  the  foreign  courts  is  not  necessary ;  or  where  the  foreign 
statutes  in  a  spirit  of  comity  give  the  domiciliary  administrator  or 
executor  power  to  act. 

As  to  guardians,  etc.,  upon  principles  of  comity,  the  authority 
of  a  guardian  appointed  in  the  stale  of  the  ward's  domicile 
will  sometimes  be  recognized  by  the  courts  of  other  states,  and 
in  some  states  statutes  have  been  enacted  enabling  foreign 
guardians  of  non-resident  wards  who  have  properly  in  the  state 
to  obtain  authority  to  act  in  reference  to  such  property  or  to  re- 
move it  from  the  state. 


540 


PRACTICAL  PROBLEMS  IN  RANKING  AND  CURRENCY 


As  to  receivers,  it  is  well  settled  that  they  will  be  permitted  to 
sue  and  act  in  jurisdictions  other  than  where  they  arc  appointed, 
where  this  will  not  result  in  the  violation  of  any  principle  of 
public  policy  or  law. 

The  fiduciaries  we  have  spoken  of  in  this  general  way  are 
natural  persons.  The  general  principles  heretofore  indicated  must 
be  further  modified  when  applied  to  corporate  fiduciaries.  A  cor- 
poration, so  far  as  its  inherent  power  to  do  the  business  authorized 
by  its  charter  is  concerned,  can  engage  in  business  anywhere,  and 
is  not  limited  by  the  bounds  of  the  state  of  its  organization,  or 
prohibited  from  doing  business  in  other  states,  unless  the  laws  or 
public  policy  of  such  other  state  deny  it  the  right.  It  has  been 
said  a  corporation  can  have  no  legal  existence  beyond  the  bounds 
of  the  state  by  which  it  is  incorporated  and  can  exercise  none  of 
the  privileges  conferred  by  its  charter  in  any  other  state  except  by 
comity  and  the  consent  of  the  latter.  Comity  is  presumed  to  exist 
and  does  exist  until  a  state  expresses  an  intention  to  the  contrary 
in  some  affirmative  way,  by  direct  enactments  on  the  subject,  or  by 
its  public  policy  deduced  from  the  general  course  of  legislation, 
or  by  settled  adjudications  of  its  courts  of  last  resort.  Our  national 
Supreme  Court  has  said  that  corporations  of  other  states  are  not 
"citizens"  within  the  meaning  of  the  clause  of  our  Constitution 
above  referred  to.  It  follows  that  a  state  may  discriminate  in  favor 
of  its  own  corporations  against  corporations  of  another  state.  Our 
states  have  quite  generally  adopted  laws  regarding  foreign  corpora- 
tions, permitting  them  to  do  business  under  restrictions  more  or 
less  severe. 

In  contemplation  of  law,  personalty  is  situate  at  the  domicile 
of  the  owner,  though  actually  at  some  other  place;  and  if  the 
property  of  the  trust  is  personalty,  it  is  a  general  principle  that  a 
transfer  to  the  fiduciary,  valid  according  to  the  law  of  the  domicile 
of  the  grantor,  will  be  recognized  in  the  state  where  the  property 
may  actually  be.  In  all  cases  the  validity  and  effect  of  conveyances 
of  real  property  is  determined  by  the  laws  of  the  state  where  the 
property  is  situate ;  these  vary  as  to  forms  of  conveyances  and 
acknowledgments  required,  and  the  only  rule  is  in  each  instance 
to  follow  the  statutory  requirements  of  the  several  states.     In  some 


TRUST  COMPANY  SECTION 


541 


states  corporations  are  not  permitted  to  hold  real  estate,  and  in  such 
states  a  corporate  fiduciary  could  not  take  and  hold  title. 

I  have  looked  over  the  statutes  of  the  various  states  for  enact- 
ments regarding  the  several  classes  of  foreign  fiduciaries,  touching 
upon  their  right  to  do  business  in  the  several  states,  I  find  that 
practically  all  the  states  permit  foreign  corporations  under  restric- 
tions to  do  business  generally,  but  not  all  provide  for  corporate 
fiduciaries.  Where  the  state  knows  no  corporate  fiduciary  under 
its  own  laws,  it  is  almost  safe  to  conclude  that  foreign  corporate 
fiduciaries  will  not  be  recognized,  as,  on  principle,  a  state  will  not 
allow  a  foreign  corporation  to  do  an  act  within  its  limits  that  it 
does  not  permit  its  own  corporations  to  do. 

Most  of  the  states  by  enactments  permit  foreign  executors,  ad- 
ministrators, and  guardians  to  represent  their  trusts  in  the  state 
under  various  restrictions,  usually  requiring  bond  and  proof  of  their 
appointment  in  the  domiciliary  state,  but  sometimes  permitting 
them  to  do  only  specific  acts.  There  are  but  few  states  whose 
statutes  deny  such  foreign  fiduciaries  any  recognition.  As  to 
foreign  assignees,  receivers,  and  trustees,  the  statutes  are  for  the 
most  part  silent.  From  the  trend  of  legislation  there  is  a  marked 
spirit  of  comity  between  our  states,  which  I  am  indeed  glad  to  see. 
In  many  instances  it  means  the  proper  business  management  of  a 
trust  by  one  fiduciary  familiar  with  all  the  affairs  of  the  estate.  This 
is  of  great  importance  to  the  beneficiaries,  saving  double  court  costs 
and  fiduciary  fees,  and  enabling  the  one  fiduciary  to  derive  for  the 
beneficiaries  the  incalculable  benefits  of  a  harmonious  and  uniform 
management  of  the  whole  estate,  just  as  in  the  case  of  the  former 
owner  himself.  I  am  an  advocate  of  even  more  liberal  laws  on 
the  line  of  the  recognition  by  other  states  of  fiduciaries  of  sister 
states  than  we  find  at  present ;  and  as  no  beneficiary  or  creditor 
of  an  estate  is  denied  the  privilege  of  redressing  his  wrongs,  whether 
he  be  a  resident  or  non-resident  of  the  state,  there  is  no  sound 
reason  why  there  should  be  any  hostility  whatever  toward  foreign 
fiduciaries  properly  appointed  under  reasonable  regulations  as  to 
giving  bond  and  the  performance  of  their  duties. 


542    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

THE  POWER  OF  ATTORNEY  FROM  EXECUTORS  AND 
TRUSTEES,  FROM  THE  VIEWPOINT  OF  THE 

DEPOSITARY 

ADDRESS  DELIVERED  BY  JORDAN  J.  ROLLINS,  OF  THE  NEW  YORK  BAR,  BEFORE  THE  NEW 
JERSEY    BANKERS'    ASSOCIATION    AT    ATLANTIC    CITY,    MARCH,    I905. 

There  is  a  prevalent  opinion  among  the  officers  of  banks  and 
trust  companies,  at  least  in  the  city  of  New  York,  that  any  deposi- 
tary which  recognizes  a  power  of  attorney  from  an  administrator, 
executor,  or  trustee  authorizing  another  to  draw  checks  upon  a  trust 
account,  thereby  incurs  an  unwarranted  responsibility.  As  the 
question  whether  it  is  safe  to  recognize  such  a  power  of  attorney  is 
a  practical  one,  which  all  of  you  may  in  due  course  be  called  upon 
to  decide  for  yourselves,  it  may  interest  you  to  have  submitted  at  this 
time  some  principles  which  will  aid  you  in  reaching  a  correct 
decision  in  the  premises. 

Obviously,  every  depositary,  recognizing  the  advantage  to  itself 
which  lies  in  accommodating  its  customers,  desires  to  facilitate  them 
in  the  despatch  of  their  business  in  every  way  consonant  with  safety. 
And  this  desire  must  obtain  in  connection  with  estate  accounts, 
which  often  are  maintained  for  considerable  periods  of  time,  and 
not  infrequently  reach  figures  of  magnitude. 

Curiously  enough,  there  seems  to  be  no  judicial  decision  re- 
ported in  the  books  dealing  with  the  question  which  we  are  to  discuss, 
and  in  the  discussion  of  which  we  shall  use  the  word  "trustee"  as 
including  administrators,  executors,  and  trustees,  whether  appointed 
by  testament  of  instrument  inter  vivos,  unless  the  context  clearly 
indicates  a  contrary  intention. 

In  determining  what  a  depositary  may  safely  do  when  confronted 
with  a  trustee's  check,  drawn  by  attorney,  upon  the  estate  account, 
two  things  are  to  be  considered:  first,  the  extent  of  the  right  of  a 
trustee  to  give  a  power  of  attorney  for  that  purpose ;  and,  second, 
the  position  of  the  depositary  in  the  premises,  and  the  extent  of  its 
duty  or  right  to  inquire  into  or  interfere  with  the  acts  of  a  trustee 
dealing  with  the  trust  deposit  account. 

First,  let  us  consider  the  authority  of  the  trustee.  Obviously, 
the  only  objection  to  the  conduct  of  a  trustee  in  delegating  to  others 
any  of  the  duties  connected  with  the  performance  of  his  trust  lies  in 


TRUST  COMPANY  SECTION  543 

the  fact  or  theory  that  by  his  appointment  a  special  confidence  has 
been  reposed  in  his  personal  qualifications,  and  that  by  employing 
another  to  do  what  he  has  been  entrusted  to  do  he  betrays  that  con- 
fidence. The  law,  accordingly,  has  laid  down  the  rule  embodied 
in  the  old  maxim,  "delegatus  non  potest  delegare,"  literally,  "one 
delegated  cannot  delegate" ;  that  is  to  say,  he  who  is  appointed  to  do 
a  thing  for  another  may  not  himself  appoint  another  to  do  it. 

The  person  who  designates  a  trustee,  as  well  as  the  court  which 
finally  authorizes  him  to  act,  generally  relies  upon  his  having  three 
qualifications — pecuniary   responsibility,  integrity,  and  ability. 

So  far  as  pecuniary  responsibility  is  concerned,  it  is  quite  clear 
that  there  can  be  no  betrayal  of  confidence  on  the  part  of  the  trustee 
in  employing  an  agent  or  attorney  to  act  for  him  in  the  performance 
of  the  duties  of  the  trust.  If  the  trustee  is  insolvent,  and  has  given 
no  bond,  he  is  equally  insolvent  whether  he  acts  in  person  or  by 
another;  indeed,  in  acting  by  another  he  may  render  the  beneficiary 
more  secure,  for  the  agent  may  be  solvent,  and  if  he  be  in  fault, 
liable  for  the  loss  occasioned  thereby. 

Lack  of  integrity  is  often  guarded  against  by  bond,  and,  in 
general,  a  sufficient  bond  eliminates  that  element  from  consideration. 
But  where  there  is  no  bond,  the  question  of  the  trustee's  integrity 
and  the  delegation  of  his  power  to  another  become,  in  fact,  of  vital 
importance.  And  yet,  if  the  trustee  exercise  his  own  integrity  in 
the  premises  by  requiring  and  obtaining  from  the  agent  whom  he 
employs  adequate  security  for  the  estate  in  the  form  of  a  bond  or 
indemnity,  or  in  the  character  and  resources  of  the  agent,  the 
trustee  does  not  betray  the  trust  in  his  own  integrity.  On  the  con- 
trary, he  justifies  it  by  affording  the  beneficiaries  security  in  addi- 
tion to  what  they  had  before. 

Ability,  however,  cannot  be  adequately  supplemented  by  pecuni- 
ary arrangements,  and  where  the  act  to  be  done  requires  the  exercise 
of  discretion,  knowledge,  or  skill,  the  beneficiary  has  the  right  to 
have  the  duty  performed  by  the  trustee  himself. 

It  would,  therefore,  seem  that  as  a  general  proposition  the 
interests  of  the  creator  of  a  trust  and  of  the  beneficiaries  are  pre- 
judiced by  the  delegation  to  an  agent  of  the  powers  of  the  trustee, 
only  where  the  power  delegated  involves  the  exercise  of  those  per- 
sonal qualities   for  which  the   trustee  has  been   chosen ;   that  such 


544     PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

qualities  may  be  summed  up  under  the  heads  of  personal  integrity 
and  special  personal  ability ;  and  that  the  former  becomes  compar- 
atively unimportant  where  independent  of  it  the  beneficiaries  are 
amply  secured  for  the  proper  execution  of  the  trust. 

In  determining  the  extent  of  the  right  of  a  trustee  to  delegate 
to  others  the  performance  of  acts  in  furtherance  of  his  trust,  the 
courts  have  followed  the  plain  dictates  of  reason.  Their  decisions 
on  the  subject  may  be  summed  up  as  follows:  Where  the  essence  of 
the  trust  is  that  the  trustee  shall  do  certain  acts  himself,  in  person, 
he  may  not  employ  another  to  do  them.  Where  the  essence  of  the 
trust  is  merely  that  he  shall  cause  certain  things  to  be  done,  in  doing 
those  things  he  may  employ  for  the  purpose  any  proper  person  as 
his  agent  or  attorney.  And  to  this  may  be  added  the  obvious  propo- 
sition that  where  it  is  necessary,  or  unmistakably  beneficial,  to  the 
performance  of  the  trust,  the  trustee  should  act  by  agent  or  attorney ; 
for  in  such  case  to  refrain  from  so  doing  would  defeat,  instead  of 
furthering,  the  object  of  the  trust. 

The  case  of  Keim  v.  Lindley,1  decided  in  the  Court  of  Chan- 
cery of  New  Jersey  in  1895,  contains  an  admirable  exposition  of  the 
principles  by  which  the  law  determines  the  right  of  a  trustee  to  act 
by  agent  or  attorney.  In  that  case  it  was  held  that  trustees  with  a 
discretionary  power  to  sell  could  not  delegate  that  discretion  to 
another,  but,  having  exercised  the  discretion  and  determined  to  sell, 
and  fixed  a  price,  they  might  authorize  an  agent  to  contract  in  their 
names  upon  those  terms.     To  quote  from  the  opinion  of  the  court : 

"The  rule  invoked  is  that  a  power  involving  the  exercise  of 
personal  discretion  and  judgment  cannot  be  delegated."  .  .  .  "An 
examination  of  the  authorities  shows  that  the  prohibition  is  against 
the  delegation  of  the  personal  discretion  and  judgment.  But,  if 
the  trustee  or  donee  of  the  power  actually  exercises  the  discretion 
and  judgment  in  a  reasonable  manner,  and  arrives  at  a  conclusion, 
he  may  delegate  to  another  the  mere  ministerial  duty  of  carrying  out 
that  judgment.  Mr.  Lewin  (page  258)  says:  'It  must  be  noticed 
that  the  appointment  of  an  attorney  or  proxy  is  not  in  all  cases  the 
delegation  of  the  trust.  When  the  trustee  has  resolved  in  his  own 
mind  in  what  manner  to  exercise  his  discretion,  he  cannot  be  said  to 
delegate  any  part  of  the  confidence  if  he  merely  execute  the  deed 

1  Keim  v.  Lindley,  30  Atl.  Rep.  1063,  at  p.  1074. 


TRUST  COMPANY  SECTION  545 

by  attorney  or  signify  His  will  by  proxy.'  '  ...  "In  1  Perry  on 
Trusts,  Sec.  409,  the  learned  author,  speaking  of  the  delegation  of 
discretionary  trusts,  says :  'But  it  must  be  observed  that  the  appoint- 
ment of  an  attorney,  proxy,  or  agent,  is  not  necessarily  a  delegation 
of  the  trust.  The  trustee  must  act  at  times  through  attorneys  or 
agents,  and  if  he  determines  in  his  own  mind  how  to  exercise  the 
discretion,  and  appoints  agents  or  instruments  to  carry  out  his 
determination,  he  cannot  be  said  to  delegate  the  trust,  even  though 
deeds  or  other  instruments  are  signed  by  attorneys  in  his  name.  So, 
if  he  gives  instructions  to  his  attorneys  and  agents  how  to  act,  it 
cannot  be  said  to  be  a  delegation  of  the  trust.'  " 

The  court  quotes  further  from  Hill  on  Trustees  (p.  541)  as 
follows:  "'However,  the  employment  of  an  agent  for  carrying  out 
mere  ministerial  acts — such  as  the  sale  of  the  property,  and  purposes 
of  that  nature — is  not  within  this  rule,  for  such  acts  are  necessary 
to  the  discharge  of  the  trust,  and  it  will  be  sufficient  that  the  trustee 
retains  the  supervision  and  control  over  the  persons  so  employed.'  " 

In  a  case  decided  in  the  Supreme  Court  of  New  York,  in  the 
first  department,  at  general  term,  in  1890, 1  where  a  trust  com- 
pany, as  guardian  of  infants,  had  employed  an  agent  to  collect  rents, 
Presiding  Justice  Van  Brunt  said : 

"It  was  clear  that  the  trust  company  was  entitled  to  employ 
agents  for  the  collection  of  these  rents,  and,  having  that  legal  right, 
they  could  lawfully  pay  for  the  services  of  such  agents.  The  point 
made  by  the  appellant  seems  to  be  that  the  defendants  were  collecting 
rents  upon  their  own  account.  But  it  appears  that  the  trust  com- 
pany, as  guardian  of  the  infants,  was  in  reality  managing  the  estate, 
and  as  such  had  a  right  to  employ  all  suitable  agents." 

A  most  lucid  and  thorough  discussion  of  the  extent  of  a  trustee's 
power  to  act  through  other  persons  is  contained  in  the  report  of  a 
case  decided  in  1883  m  the  English  Supreme  Court  of  Judicature, 
Chancery  Division.2  Sir  George  Jessel,  Master  of  the  Rolls,  said, 
in  the  course  of  his  opinion: 

"In  the  firsl  place.  [  think  we  ought  to  consider  what  is  the  lia- 
bility of  a  trustee  who  undertakes  an  office  which  requires  him  to 
make  an  investmenl   in  behalf  of  his  cestui  que  trust.     It  seems  to 

1  Garvcy  v.  Owens.  r_>  N.  Y.   Supp.  349.  350. 

2  Spright  v.  Gaunt,  22  Ch.  Div.  727,  7yj,  742. 

35 


546  PRACTICAL  PROBLEMS  IN  RANKING  AND  CURRENCY 

me  that  on  general  principles  a  trustee  ought  to  conduct  the  business 
of  the  trust  in  the  same  manner  that  an  ordinarily  prudent  man  of 
business  would  conduct  his  own,  and  that  beyond  that  there  is  no 
liability  or  obligation  on  the  trustee.  In  other  words,  a  trustee  is 
not  bound,  because  he  is  a  trustee,  to  conduct  business  in  other  than 
the  ordinary  and  usual  way  in  which  s'imilar  business  is  conducted 
by  mankind  in  transactions  of  their  own.  It  never  could  be  reason- 
able to  make  a  trustee  adopt  further  and  better  precautions  than  an 
ordinarily  prudent  man  of  business  would  adopt,  or  to  conduct  the 
business  in  any  other  way.  If  it  were  otherwise,  no  one  would  be 
a  trustee  at  all."  .  .  .  Lord  Hardwick  was  quoted  as  saying :  "But 
where  trustees  act  by  other  hands,  either  from  necessity  or  con- 
formably to  the  common  usage  of  mankind,  they  are  not  answerable 
for  losses,'-'  the  Master  of  the  Rolls  adding,  "That,  of  course,  means 
where  they  act  by  other  hands,  and  properly  choose  the  hands  by 
which  they  act." 

Moreover,  under  modern  conditions,  it  cannot  be  said  that  a 
person,  in  selecting  trustees,  relies  upon  their  personal  performance 
of  all  the  duties.  A  trust  company,  for  instance,  acting  as  trustee, 
can  never  give  its  personal  services,  for  a  corporation  can  act  only 
through  its  agents.  A  man  of  business,  as  business  is  conducted 
to-day,  is  often  in  like  predicament.  The  men,  of  all  others,  apt 
to  be  selected  for  offices  of  trust  are  those  who  are  engaged  in  the 
successful  management  of  large  affairs.  Such  men  do  not  and 
cannot  attend  in  person  to  details.  If  they  attempted  to  do  so, 
they  would  utterly  fail  to  accomplish  the  large  enterprises  which  they 
now  conduct  with  success.  The  very  essence  of  the  competency 
which  renders  them  especially  fit  for  the  administration  of  trusts  is 
the  ability  to  secure  and  use  the  services  of  competent  and  trust- 
worthy agents  and  employees.  It  is  this  which  the  creator  of  the 
trust  expects  from  the  trustee.  A  contrary  theory  would  prevent 
corporations  and  individuals,  who  conduct  their  business  upon  large 
modern  lines,  from  acting  as  trustees. 

It  is  clear,  then,  in  law,  as  well  as  in  fact  and  reason,  that  at 
times  trustees  should  act  through  agents,  and  that  such  a  course  is 
not,  except  under  special  circumstances,  a  betrayal  of  the  confidence 
of  the  trustor.     Why,  then,  should  a  trustee  not  delegate  the  author- 


TRUST  COMPANY  SECTION 


547 


ity  to  draw  checks  upon  the  estate  account?     Is  it  a  discretionary 
rather  than  a  ministerial  act? 

Let  us  assume  a  case  which  is  not  unlikely  to  arise:  A  testator 
believes  that  his  estate  will  be  best  managed  after  his  death  by  his 
friend  B.  In  forming  this  conclusion,  he  relies  on  the  results  that 
B  has  obtained  in  the  conduct  of  his  own  business,  and  on  his  reputa- 
tion for  integrity  and  ability.  B  is  a  man  of  large  affairs.  He 
commands  a  large  staff  of  employees,  and  his  ability  actually  con- 
sists in  getting  the  best  possible  work  out  of  the  best  possible  men. 
During  his  executorship  he  is  called  abroad,  it  may  be  in  the  interest 
of  the  testator's  estate  to  prove  title  to  foreign  property.  In  his 
absence  it  is  necessary  that  someone  be  on  hand  to  attend  to  the 
management  of  the  estate  at  home.  There  is  property  to  be  pre- 
served and  cared  for;  there  are  current  expenses  to  be  paid  out  of 
the  funds  of  the  estate ;  it  may  be  that  there  is  more  to  do  than  any 
one  man  can  do,  that  a  number  of  persons  must  be  employed  and 
paid  from  time  to  time,  and  that  it  is  impossible  to  foresee  with 
accuracy  what  the  necessary  current  expenses  will  be.  He  must 
leave  an  agent  in  charge,  and  that  agent  must  be  able  to  draw  for 
certain  purposes  upon  the  funds  of  the  estate.  It  appears  to  be  clear 
that  in  such  a  case  it  would  be  not  only  the  right,  but  the  duty,  of 
the  trustee  to  appoint  a  proper  agent,  empowered  to  do  these  things, 
and  that  such  appointment  would  be  the  best  and  only  possible 
exercise  of  the  trustee's  discretion  in  the  interest  of  the  beneficiaries. 

It  is  true  that  in  authorizing  another  to  draw  against  the  credit 
of  the  estate  the  trustee  places  the  trust  money  in  another's  actual 
control ;  and  it  may  be  argued  that  this  is  a  breach  of  his  trust, 
because  confidence  has  been  placed  not  only  in  his  ability  and  dis- 
cretion, but  in  his  personal  integrity  in  handling  these  moneys.  But 
it  should  be  remembered  that  a  trustee  must,  in  almost  any  con- 
ceivable case,  leave  the  property  of  the  estate  under  the  actual  phys- 
ical control  of  other  persons.  If  he  employs  an  agent  to  collect 
rents,  or  a  broker  to  purchase  securities,  or  a  depositary  for  specific 
valuables,  or  a  caretaker  in  charge  of  a  furnished  house,  he  is  nec- 
essarily placing  property  of  the  estate  in  the  hands  and  physical  con- 
trol of  third  persons,  and  he  can  only  give  the  estate  the  benefit  of 
his  personal  integrity  in  such  cases  by  refraining  from  fraud,  and, 
to  the  best  of  his  ability,  appointing  to  handle  the  property  persons 


548  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

who  will  do  likewise,  instructing  them  strictly  as  to  what  is  to  be 
done. 

Finally,  to  sign  and  present  checks,  receive  money  and  apply  it 
in  certain  specified  ways  and  amounts,  is,  apparently,  a  purely  min- 
isterial act,  does  not  appear  to  involve  the  exercise  of  the  personal 
discretion  sought  from  the  trustee,  and  may,  therefore,  properly  be 
delegated.  It  is  clear,  then,  that  the  trustee's  power  of  attorney  for 
the  purpose  of  signing  checks  is  not  in  itself  improper,  and,  on  the 
other  hand,  may  be  beneficial,  or  even  necessary,  to  the  trust. 

Now  who  is  to  determine  at  the  time  whether  such  a  course  is 
better  or  worse  for  the  estate?  The  trustee,  naturally,  for  he  is 
appointed  for  that  very  purpose — to  exercise  his  best  judgment  for 
the  benefit  of  the  estate. 

Let  us  now  consider  the  point  more  directly  at  issue — the  posi- 
tion of  the  depositary.  Ordinarily,  of  course,  the  bank  or  trust 
company  receiving  moneys  to  be  credited  upon  a  deposit  account, 
and  drawn  upon  by  check,  is  simply  the  debtor  of  its  depositors.1 

That  the  same  relation  of  debtor  and  creditor  obtains  between 
the  depositary  and  a  trustee  was  finally  recognized  by  the  New  York 
Court  of  Appeals  in  the  somewhat  recent  case  of  O'Connor  v. 
Mechanics'  Bank.2  In  the  course  of  the  opinion  we  find  the 
following : 

"As  the  legal  title  to  the  personal  property  [the  property  left  by 
the  testator]  before  it  was  sold,  was  in  the  executors,  so  the  legal 
title  to  the  proceeds  of  the  sale  was  in  them.  When  they  deposited 
the  proceeds  in  the  bank,  however,  the  title  to  the  money  passed  to 
defendant,  which  impliedly  promised  to  pay  the  debt  thereby  created 
by  honoring  the  checks  of  the  depositor  as  they  were  presented.. 
Thenceforward  the  relation  of  the  bank  to  the  executors  was  that 
of  debtor  and  creditor  only.  In  a  legal  sense,  the  executors  had  no 
money  in  the  bank,  but  simply  a  debt  against  the  bank  for  the 
amount  of  the  deposit." 

This  decision  seems  to  be  in  strict  conformity  with  the  facts, 
with  reason,  and  with  the  actual  course  of  business.     Consider  what 

1  The  Aetna  National  Bank  v.  the  Fourth  National  Bank  of  the  City  of 
New  York,  46  N.  Y.  82. 

2 124  N.  Y.  324,  330.  See  also  National  Bank  v.  Insurance  Co.,  104  U.  S., 
54  to  63. 


TRUST  COMPANY  SECTION  549 

really  takes  place.  The  trustee  is  the  person  appointed  to  manage 
the  estate,  to  hold  and  administer  the  property  until  the  trust  is  ful- 
filled. The  depositary  is  not.  Nobody  has  requested  it  to  interfere 
in  any  way  in  the  care  or  management  of  the  property,  nor  has  it 
offered  or  agreed  to  do  so.  If  the  deposit  was  made  by  a  person, 
since  deceased,  the  trustee  is  his  representative,  and,  so  far  as  the 
bank  is  concerned,  has  simply  become  its  creditor  instead  of  the 
deceased.  The  case  is  the  same  if  the  deposit  has  been  made  by  a 
person  still  living,  who  has  created  a  trust  and  put  property,  includ- 
ing the  credit  arising  from  the  deposit,  in  the  hands  and  under  the 
control  of  a  trustee.  If  the  funds  are  deposited  by  the  trustee  in 
his  official  capacity,  he  merely  opens  an  account  with  a  bank  for  his 
convenience  in  managing  the  estate.  He  does  not  delegate  to  the 
bank  any  of  his  duties,  or  any  of  his  control  over  the  credit  substi- 
tuted for  the  moneys  deposited. 

There,  therefore,  seems  to  be  no  good  ground  for  the  assumption 
that  a  depositary,  in  taking  a  deposit  of  trust  funds  subject  to  check, 
or  in  retaining  an  account  upon  which  a  trust  has  been  imposed  by 
the  death  of  a  depositor,  or  otherwise,  assumes  any  additional  duty, 
obligation,  or  responsibility,  or  acquires  any  rights  beyond  those 
existing  in  the  usual  course  of  its  business  with  its  depositors. 
Plainly,  it  can  become  liable  to  the  beneficiary  only  through  some 
fault  of  its  own.  This  fault  may  occur  either  through  a  refusal  to 
pay  to  the  beneficiary  moneys  to  which  the  beneficiary  has  become 
entitled,  as  against  the  trustee,  when  there  is  a  subsisting  account 
and  the  depositary  has  due  notice  that  the  beneficiary  has  acquired 
a  right  to  make  demand  thereon ;  or  through  actual  knowledge  of 
an  abuse  of  the  credit,  and  a  connivance,  active  or  passive,  in  that 
abuse. 

But  there  seems  to  be  no  ground  upon  which  it  can  be  required 
to  exceed  or  depart  from  the  usual  course  of  business  between 
depositary  and  depositor,  for  the  purpose  of  discovering  an  abuse 
of  the  credit,  unless  circumstances  are  such  that  any  reasonable 
person  would  believe  that  wrong  was  being  done  to  the  beneficiaries. 
In  such  a  case  it  may  be  bound,  not  because  it  is  a  depositary,  but 
like  any  and  every  person  subject  to  the  law,  to  abstain  from  wrong- 
doing, either  by  act  or  tacit  consent. 

An  excellent   illustration  of  the  circumstances    under   which   a 


55° 


PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 


bank  is  so  charged  with  knowledge  of  fraud  as  to  act  at  its  own 
risk  is  afforded  by  the  case  of  Ihl  v.  the  Rank  of  St.  Joseph,  ! 
decided  in  1887  by  the  Kansas  City  Court  of  Appeals.  In  that  case 
it  appeared  that  the  plaintiff,  Ihl,  wishing  to  give  security  to  those 
who  had  become  his  bondsmen,  deposited  with  one  Frenger,  as 
receiving  teller  of  the  defendant  bank,  certain  drafts  for  collection, 
with  instructions  that  the  proceeds  be  credited  to  Frenger's  account — 
but  whether  to  Frenger  as  trustee,  or  to  Frenger  simply  in  his  own 
name,  was  not  ascertained  when  the  case  came  up  on  appeal.  The 
drafts  were  collected  and  the  proceeds  credited  to  Frenger  in  his 
own  name,  and  not  to  him  as  trustee.  On  the  day  on  which  the 
credit  was  given  to  Frenger  he  drew  out  the  entire  amount  and  con- 
verted it  to  his  own  use.  There  was  no  evidence  of  collusion  be- 
tween Frenger  and  the  bank,  as  represented  by  its  other  officials,  or 
that  the  bank  profited  by  the  misappropriation.  Some  time  after, 
with  the  consent  of  his  sureties,  for  whose  indemnity  the  deposit  was 
made,  Ihl,  the  plaintiff,  demanded  the  amount  from  the  bank,  which 
refused  payment. 

The  court,  after  observing  that  it  was  conceded  that  the  bank 
had  credited  the  proceeds  to  Frenger's  private  account,  went  on  to 
say  that  if  the  plaintiff  directed  this  to  be  done,  then  (to  quote  the 
exact  language  of  the  decision),  "there  was  no  liability  on  the  part 
of  the  defendant,  unless  it  was  bound  in  law,  under  the  facts  of  this 
case,  not  only  to  credit  the  proceeds  of  the  drafts,  when  collected  in 
the  manner  directed  by  the  plaintiff,  but  also  to  see  to  the  proper 
appropriation  of  the  proceeds  of  the  draft  by  the  person  to  whose 
account  they  were  thus  credited,"  and  then  continued  as  follows : 

"We  do  not  understand  that  any  such  obligation  was  imposed 
upon  the  bank  by  law,  under  the  facts  of  this  case.  Frenger  was 
the  bank's  teller,  and  knew  of  the  terms  on  which,  and  the  objects 
for  which,  the  deposit  was  made.  But,  in  so  far  as  concerns  the 
carrying  out  of  the  terms  of  the  trust  agreement  between  him  and 
the  plaintiff,  he  was  acting  simply  for  the  parties  to  the  agreement, 
and  not  at  all  within  the  scope  of  his  agency  or  official  duty  as  an 
officer  of  the  bank.  His  knowledge  was  not  the  knowledge  of  the 
bank,  either  as  to  the  terms  of  the  trust  agreement  or  as  to  his  inten- 

1 25  Mo.  App.  i2g,  140. 


TRUST  COMPANY  SECTION  551 

tion  in  drawing  the  money  out  of  the  bank.  .  .  .  Besides,  if  the 
bank  properly  credited  the  proceeds  of  the  drafts  to  the  individual 
account  of  Frenger,  Frenger  had  the  right,  as  against  the  bank,  to 
draw  the  money  out  of  the  bank  for  the  purpose  of  misappropriating 
it,  although  the  bank  knew  of  such  purpose.  This  is  true,  because 
'the  banker  is  not  justified  in  refusing  to  honor  the  depositor's  check 
because  he  knows  or  believes  that  the  check  is  an  appropriation  of 
funds  to  a  person,  or  for  a  purpose,  to  whom,  or  for  which,  the 
depositor  is  not  lawfully  authorized  to  appropriate  those  funds.  For, 
if  the  banker  should  look  into  this  matter  he  would  make  himself, 
improperly,  a  party  to  an  inquiry  between  his  customer  and  a  third 

party.'  "  ' 

The  court,  after  quoting  the  above  passage  from  Morse  on 
Banks  and  Banking,  continues:  'The  author,  in  that  connection, 
however,  adds:  'But  if  the  depositor  seeks  to  pay  his  own  debt  to 
the  banker  by  the  appropriation  of  funds,  to  his  credit  in  a  fiduciary 
capacity  with  the  banker,  then  the  banker  is  affected  with  knowl- 
edge of  the  unlawful  character  of  the  appropriation,  and  would  be 
compelled  to  refund.'  "  2 

The  court  further  said  that  whether  the  drafts  were  given  to 
Frenger  as  teller,  or  not,  "when  the  bank  received  the  drafts,  through 
him,  for  collection,  he  acted  for  the  bank,  and  the  knowledge  had 
by  him  as  to  the  proper  disposition  to  make  of  the  proceeds  of  the 
drafts  was  the  bank's  knowledge,  because  it  pertained  to  a  matter 
within  the  scope  of  his  official  duty,  and  as  to  which  he  acted 
officially."  And  it  was  concluded  that  if  Ihl,  the  plaintiff,  directed 
that  the  proceeds  of  the  drafts  be  credited  to  Frenger's  individual 
account,  the  bank  was  not  liable ;  but  that  if  he  directed  that  they  be 
credited  to  Frenger  as  trustee,  then  the  bank  was  liable. 

The  foregoing  decision  seems  to  be  a  very  accurate  exposition 
of  the  grounds  of  a  depositary's  liability  in  regard  to  the  disposal 
of  trust  funds  on  deposit,  and  of  the  extent  of  its  duty  concerning 
such  disposal.  In  brief,  a  bank  has  ordinarily  no  duty  to  observe, 
or  right  to  interfere,  with  the  disposal  of  payments  made  to  the 
depositor,  or  any  right  to  refuse  payment  of  checks  duly  drawn  on 
deposit  accounts,  any  more  than  other  debtors  have  a  right  to  refuse 

'Quoting  Morse  on  Banks  and  Ranking,  Sec.  317. 
*  Morse  on  Banks  and  Banking,  Sec.  317. 


552  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

payment  to  a  creditor  or  to  concern  themselves  with  the  disposal  of 
the  money  when  the  debt  is  paid. 

The  only  distinctions  in  case  of  trust  deposits  would  seem  to  be 
that  where  a  bank  has  actual  knowledge  that  a  breach  of  trust  is 
intended,  it  would  be  chargeable  with  loss  occasioned  by  its  conni- 
vance in  the  breach,  and  that  in  such  a  case  it  would  be  the  right  and 
the  duty  of  the  bank  to  refuse  to  pay  the  moneys  for  the  unlawful 
purpose. 

There  apparently  is  no  principle  of  law  requiring  a  depositary 
to  go  out  of  the  usual  course  of  business  to  detect  the  possibility  or 
probability  of  a  misappropriation  of  funds  represented  by  checks 
drawn  upon  the  depositor.  If  there  were,  it  would  be  necessary 
for  a  depositary,  before  paying  any  check  drawn  by  a  trustee,  to  in- 
quire into  the  circumstances  under  which  the  check  was  drawn,  and 
to  learn  the  consideration  for  the  check  and  the  intended  or  probable 
application  of  the  proceeds. 

It  may  be  well,  before  closing,  to  mention  one  peculiarity  of  the 
statute  law,  which  may  seem  to  have  some  bearing  on  the  matter  now 
under  discussion,  so  far  as  trust  companies  are  concerned.  In  New 
York  and  New  Jersey,  at  least,  trust  companies  are  specially  author- 
ized "to  receive  deposit  of  trust  moneys,  securities,  and  other  per- 
sonal property."  x 

Why  trust  moneys?  Without  discussing  this  question  at  length, 
it  seems  safe  to  conclude  that  the  express  power  to  receive  such 
deposits  is  conferred  upon  trust  companies  in  order  that  there  may 
be  no  doubt  that  trustees,  in  depositing  with  them,  will  be  pro- 
tected in  the  event  of  unsuspected  insolvency. 

For  the  foregoing  reasons,  among  others,  it  would  seem  that  a 
depositary  may  properly  receive  and  act  upon  a  power  of  attorney 
from  a  trustee  authorizing  another,  as  attorney,  to  draw  checks  upon 
the  account  of  the  trust  estate ;  provided,  however,  that  the  instru- 
ment creating  the  trust,  or  the  decree  appointing  the  trustee,  has  not 
forbidden  him  to  act  by  attorney  in  that  particular. 

In  conclusion,  let  me  caution  you  to  see  that  this  power  to  dele- 
gate authority  is  not  denied  to  the  person  executing  the  power  of 
attorney,  should  you  ever  be  called  upon  to  consider  such  an  instru- 
ment purporting  to  be  the  act  of  a  trustee. 

'New  York  Banking  Law,  Sec.  156;    New  Jersey  P.  L  1899,  P-  453- 


TRUST  COMPANY  SECTION  553 

DUTIES  OF  TRUSTEES   OF  FINANCIAL 
CORPORATIONS 

ADDRESS  DELIVERED  BY  WILLIS  S.  PAINE,  EX-PRESIDENT  OF  THE  CONSOLIDATED  NA- 
TIONAL BANK  OF  NEW  YORK,  BEFORE  THE  AMERICAN  BANKERS'  ASSOCIATION, 
AT   RICHMOND,    VA.,   OCTOBER,    IOOO. 

It  is  a  remarkable  fact  that  while  the  largest  trust  companies  of 
the  United  States  are  located  in  the  city  of  New  York,  such  institu- 
tions were  not  examined  by  the  superintendent  of  the  Banking 
Department  until  the  year  1874.  Indeed,  previous  to  that  time  there 
were  no  general  laws  applicable  to  such  corporations.  All  trust, 
loan,  mortgage,  security,  guarantee,  or  indemnity  companies  or  asso- 
ciations were  operated  under  the  provisions  of  their  respective 
charters.  Some  of  these  charters  required  reports  to  be  made  to  the 
Supreme  Court,  others  to  the  Comptroller  of  the  State.  It  was  not 
until  the  year  mentioned  that  these  corporations  were  placed  under 
the  supervision  of  the  Banking  Department  and  required  to  make 
full  reports  in  writing  to  it,  verified  by  the  oaths  of  the  officers  of 
such  corporations,  and  containing  such  statements  as  to  the  condi- 
tion of  their  affairs  and  business  as  the  superintendent  might  require. 
Under  the  law  which  I  have  mentioned  the  superintendent  was 
required  to  examine  such  corporations  personally,  or  to  appoint  com- 
petent persons  to  make  the  same,  to  the  end  that  inquiry  be  made  as 
to  the  condition  of  these  corporations,  the  manner  of  managing  their 
affairs,  as  well  as  the  security  afforded  to  those  by  whom  its  engage- 
ments were  held. 

Perhaps  it  is  not  irrelevant  to  state  that  during  the  first  examina- 
tion the  examiners,  of  which  the  speaker  was  one,  reported  the  con- 
dition of  three  of  the  trust  companies  located  in  the  city  of  New 
York  to  the  bank  superintendent,  and  those  corporations  ceased 
doing  business.  Fortunately  the  depositors  of  these  institutions,  to 
whom  there  was  owing  over  six  million  dollars,  were  paid  in  full. 
During  the  year  1875  two  examiners,  appointed  by  the  Banking 
Department,  of  which  the  speaker  also  was  one,  found  the  trust 
companies  in  a  materially  improved  condition  by  reason  of  recom- 
mendations made  by  the  department  to  such  corporations  during  the 
preceding  year. 

Experience  has  shown  thai  seldom  has  a  trust  company  failed 
whose  last  published  statement  has   not   indicated  a   large  surplus 


554     PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

fund  or  undivided  profits.  The  reason  is  that  its  trustees  have  not 
had  the  moral  courage  to  charge  off  bad  debts  as  soon  as  their  col- 
lection is  shown  to  be  practically  impossible.  One  thought  ought 
always  to  be  borne  in  mind — that  the  possession  of  ample  cash  or  its 
equivalent  is  a  sign  of  prudent  banking.  While  the  interest  upon 
idle  capital  may  be  wholly  lost,  a  trust  company  that  is  never 
embarrassed  by  an  unexpected  demand  for  money  from  its  creditors, 
and  which  is  always  prepared  to  aid  its  depositors,  must  obtain  a 
highly  desirable  prestige. 

Trustees  should  not  rely  upon  the  researches  of  examiners  rather 
than  their  own  investigations.  Between  the  visits  of  the  examiners 
there  may  be  large  embezzlements  or  misapplications,  and  in  the 
limited  time  afforded  them  it  is  oftentimes  impossible  to  discover 
wrong-doing,  especially  in  cases  of  collusion  between  several 
employees.  If  trustees  were  all  well  informed  as  to  their  duties  and 
performed  them  thoroughly,  failures  would  be  exceedingly  rare. 
The  examinations  should  be  without  notice,  and  be  for  the  condi- 
tion of  the  institution  at  the  close  of  business  of  a  particular  day, 
the  examination  commencing  either  after  the  close  of  business  of 
that  day  or  before  the  commencement  of  business  of  the  next  business 
day,  thereby  giving  no  opportunity  for  manipulation  of  the  accounts, 
or  borrowing  assets  for  the  occasion,  and  a  constant  watchfulness 
should  be  observed  that  this  is  not  done  during  the  examination. 

The  statement  of  a  trust  company  to  the  Bank  Superintendent 
of  the  State  of  New  York  is  in  the  following  form : 

RESOURCES 

Bonds  and  mortgages. 

Stock  investments. 

Amount  loaned  on  collaterals. 

Amount  loaned  on  personal  securities,  including  bills  purchased. 

Overdrafts. 

Due  from  directors  of  the  institution. 

Due  from  banks. 

hue  from  brokers. 

Real  estate. 

Cash  on  deposit  in  banks  or  other  moneyed  institutions. 

Cash  on  hand. 

Amount  of  assets  not  included  under  any  of  the  above  heads   (accrued 
interest  receivable,  etc.). 


TRUST  COMPANY  SECTION  555 

LIABILITIES 

Capital  stock  paid  in. 

Surplus  fund. 

Undivided  profits. 

Deposits  in  trust. 

General  deposits  by  individuals,  associations,  and  corporations,  payable 
on  demand. 

Other  liabilities  not  included  under  any  of  the  above  heads,  (accrued  in- 
terest payable,  etc.). 

Every  trust  company  should  have  a  by-law  requiring  its  board 
of  trustees  to  appoint  an  examining  committee  at  least  once  in  six 
months,  whose  duty  it  should  be  to  make  a  general  examination  of 
its  affairs,  not  only  to  count  the  cash  on  hand,  but,  what  is  of  much 
greater  importance,  to  examine  into  the  amounts  stated  to  be  due 
from  various  sources,  and  to  compare  its  liabilities  and  resources 
with  the  balance  on  the  general  ledger.  The  details  of  the  books 
tributary  to  the  general  ledger  should  be  examined  and  footed,  and 
the  balances  compared  with  the  balance  representing  the  account  in 
the  general  ledger.  Failure  to  compare  the  amount  due  depositors 
as  shown  by  the  individual  ledger  with  that  account  in  the  general 
ledger,  has  been  a  serious  omission  in  many  cases,  and  thereby  defal- 
cations of  years'  standing  have  remained  undiscovered.  The  items 
which  make  up  the  cash  on  hand  in  the  drawer  of  the  institution 
should  be  carefully  scrutinized,  a  fictitious  item  sometimes  being 
taken  out  at  the  time  of  the  examination  and  sent  for  collection,  to 
be  returned  worthless  after  the  examination  is  over.  The  original 
credits  for  items  said  to  be  in  transit  and  the  letter-press  copies  of 
the  letters  remitting  the  same  should  be  examined,  and  their  receipt 
and  payment  or  non-payment  ascertained  by  correspondence.  Indeed, 
correspondence  should  be  had  with  every  bank  and  trust  company 
for  verification  of  amounts  alleged  to  be  due  from  or  to  it. 

The  general  ledger  should  represent  the  true  condition  of  the 
company ;  yet  there  are  many  cases  where  it  has  not  shown  such 
condition.  A  case  in  point  is  that  of  a  prominent  institution  which 
suffered  a  serious  loss.  In  this  instance  the  general  ledger  showed 
a  much  smaller  amount  (\x\c  depositors  than  the  individual  ledger, 
certain  amounts  deposited  not  having  been  entered  in  the  cash-book, 
but  appropriated  by  the  employee  taking  certain  deposits  and  mak- 


556     PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

ing  the  entries  direct  on  the  individual  ledger,  the  pass-book  and 
ledger  agreeing.  This  state  of  affairs  would  be  revealed  by  com- 
parisons as  before  indicated,  and  shows  the  error  of  the  common 
supposition  that  if  the  pass-books  and  ledger  agree,  nothing  further 
is  requisite,  as  far  as  such  accounts  are  concerned.  After  these 
necessary  verifications  of  the  accounts  in  detail  with  the  accounts  in 
the  general  ledger,  the  books  being  in  balance  in  every  particular, 
there  yet  may  be  concealed  some  irregularity ;  for  instance,  where 
an  officer  of  an  institution  charged  a  large  sum  to  profit  and  loss, 
crediting  the  same  to  bills  receivable,  the  authority  for  which  could 
not  be  shown,  nor  the  bills  receivable  produced.  All  entries  to  the 
profit  and  loss  account,  and  the  classifications  of  the  profit  and  loss 
account,  such  as  interest,  commissions,  expenses,  etc.,  should  be 
examined  and  their  validity  tested.  So  many  adjudications  have 
been  made  from  time  to  time  that  trustees  have  their  duties  plainly 
defined.  If,  for  instance,  notice  of  illegal  transactions  is  brought 
to  their  knowledge,  and  the  same  are  allowed  to  continue,  they  may 
be  compelled  to  make  good  any  deficiency  caused  by  such  illegality. 
While  it  is  true  that  the  higher  qualities  of  banking,  the  skillful 
management  of  its  affairs,  are  of  much  greater  importance  than  the 
constant  scrutiny  into  details,  each  may  be  valueless  without  the 
other.  A  constant  inquiry  should  be  made  as  to  the  conduct  and 
habits  of  all  the  employees  of  the  company. 

In  conclusion :  The  custodian  of  the  property  of  others  should 
welcome  the  most  careful  inquiry  as  to  the  condition  of  his  trust, 
that  the  result  may  inure  to  his  credit,  confirming  the  fact  that 
integrity  and  ability  are  necessary  adjuncts  to  the  capital  of  a  finan- 
cial institution,  co-ordinate  with  the  capital  itself. 


ESSENTIALS  REQUIRED  BY  TRUST  COMPANIES  TO  BE 
PUT  IN  MORTGAGES  AND  OTHER  PAPERS 

ADDRESS     DELIVERED     BY     ANDREW     SQUIRE,     OF     CLEVELAND,     OHIO,     BEFORE     THE 
AMERICAN    BANKERS'    ASSOCIATION,    AT    RICHMOND,    VA.,    OCTOBER,    IOOO. 

Within  the  last  twenty  years  trust  companies  have  increased 
very  rapidly,  and  probably  within  the  next  twenty  years  will  increase 
in  numbers  still  faster.     In  many  of  the  states,  as  in  the  state  of 


TRUST  COMPANY  SECTION  557 

Ohio  where  I  reside,  they  are  of  comparatively  recent  origin,  the 
statutes,  until  within  the  last  few  years,  not  permitting-  corporations 
to  be  organized  to  act  as  trustees  along  sufficiently  broad  lines  to 
induce  their  incorporation.  As  a  rule,  they  have  been  so  successful 
and  so  well  managed  that  they  are  fast  coming  to  be  recognized  as 
one  of  the  great  conservative  forces  in  every  community  where 
established. 

The  field  which  is  open  to  the  trust  company  has  not  yet  been 
fully  determined.  Almost  every  year  adds  to  its  usefulness.  While 
it  may  be  true  that  large  estates  and  large  trusts  may  occasionally  be 
better  managed  by  some  individual  peculiarly  adapted  to  the  pur- 
pose, it  is  equally  true  that  the  average  management  of  estates  and 
other  large  trusts  by  trust  companies  is  better  than  the  average  indi- 
vidual management ;  and  the  individual  management  is  liable  at  any 
time  to  be  terminated  by  the  death  of  the  individual,  while  the 
management  by  a  trust  company  should  be  continuous  until  the  end 
of  any  ordinary  trust. 

Thus  far  there  have  been  relatively  few  failures  among  trust 
companies,  and  it  is  exceedingly  important  that  they  should  be  sur- 
rounded at  all  times  with  that  careful  and  judicious  control  and 
management  which  the  law  demands  of  trustees  under  all  circum- 
stances, and  no  trust  of  any  character  should  ever  be  accepted  by  a 
trust  company,  in  the  fierce  competition  of  business,  upon  terms 
which  will  not  insure  the  bringing  to  the  management  of  such  trust 
all  of  the  care  and  fidelity  required  for  its  proper  execution.  It  is 
probably  a  safe  statement  to  make  that  the  majority  of  trustees  are 
underpaid  rather  than  overpaid  for  services  rendered,  and  trusts  are 
frequently  undertaken  that  appear  plain  and  simple  which,  before 
their  termination,  involve  a  large  amount  of  labor  and  continuous 
care  and  anxiety. 

Experience  has  shown  that  in  acting  as  trustee  under  mortgages 
securing  bonds  there  are  certain  essentials  which  should  invariably 
be  insisted  upon  by  the  trust  company  for  its  own  protection.  It  is 
not  unlikely  that,  as  our  experience  becomes  greater,  it  may  be  found 
proper  and  convenient  to  insist  upon  others;  but  it  is  the  object  of 
this  paper  briefly  to  call  attention  to  those  essentials  which  are  being 
insisted  upon  by  careful  advisers  of  trusl  companies. 

It  is  not  the  purpose  here  to  refer  to  the  trust  company  in  any 


558     PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

sense  as  a  promoter  of  any  enterprise,  or  as  agent  to  dispose  of  any 
bonds  which  may  be  secured  by  a  mortgage  making  the  trust  com- 
pany trustee ;  for  the  trust  company  as  a  promoter  and  as  a  seller  of 
bonds  occupies  a  different  and  distinct  position  from  that  which  it 
occupies  as  a  mere  trustee. 

As  a  trustee  it  is  of  first  importance  that  the  trust  company  shall 
not  permit,  in  any  mortgage  or  other  instrument  creating  it  a  trustee, 
any  representation  as  to  the  character  of  security  or  the  priority  of 
the  lien  which  may  be  in  any  sense  misleading.  Care  should  be 
taken  by  the  person  examining  the  mortgage,  if  it  be  a  mortgage,  and 
the  bond  which  it  purports  to  secure,  to  see  that  the  provisions  are 
plain  and  thoroughly  within  the  comprehension  of  the  ordinary 
purchaser  of  bonds,  who,  it  may  be  presumed,  is  less  acquainted  with 
such  instruments  and  the  provisions  which  they  should  contain  than 
the  examiner  for  the  trustee ;  and  when  the  trustee  is  called  upon  to 
certify  a  bond  secured  by  a  mortgage  or  trust  deed,  such  certifica- 
tion, it  should  be  thoroughly  understood,  is  merely  for  the  purpose 
of  identification — that  is,  to  identify  the  bond  as  one  of  the  bonds 
described  in  the  trust  deed  or  mortgage  given  for  the  purpose  of 
securing  them.  For  a  time,  one  saw,  and  even  occasionally  now, 
sees,  a  certification  something  like  this  upon  the  bond :  "It  is  hereby 
certified  that  this  bond  is  one  of  the  series  of  bonds  secured  by  the 
mortgage  or  deed  of  trust  within  mentioned."  The  use  of  the  word 
"secured"  in  this  connection  has  brought  some  trust  companies  which 
inaptly  used  it  into  litigation,  for  the  reason  that  it  was  claimed  that 
there  was  some  force  to  the  word  "secured,"  and  that  the  trust  com- 
pany's certificate  certified  that  there  was  actually  some  security  for 
the  bondholders,  when  in  reality  there  was  no  such  security,  prior 
mortgages  being  sufficient  in  amount  to  exhaust  the  property.  In 
one  instance  suit  was  brought  against  a  trustee  using  similar  phrase- 
ology, when  the  trustee  had  failed  to  record  the  mortgage  and  a  sub- 
sequent mortgage  was  recorded  which  exhausted  the  property. 
Happily  in  this  instance  for  the  trustee,  the  court,  after  holding  the 
trustee  should  be  responsible,  found  the  action  had  been  barred  by 
the  statute  of  limitations.  Careful  trust  companies  now  confine 
themselves,  in  making  such  certificates,  to  a  mere  identification  of 
the  bond  by  phraseology  substantially  as  follows :  "It  is  hereby  cer- 


TRUST  COMPANY  SECTION  559 

tified  that  this  bond  is  one  of  the  series  of  bonds  described  in  the 
mortgage  or  deed  of  trust  within  mentioned." 

The  trust  company,  as  trustee,  in  accepting  the  trust  not  only  has 
the  right,  but  it  is  its  duty,  to  insist  upon  the  instrument  containing 
such  provisions  as  will  limit  its  liability  and  its  duties  within  proper 
lines.  These  limitations  are  frequently  found  scattered  in  various 
places  through  the  mortgage,  in  various  phraseology,  and  covering 
various  conditions,  dependent  largely  upon  the  skill,  experience,  and 
care  of  the  draughtsman.  No  trust  company  should  get  into  the 
habit  of  accepting  trusts  of  any  character  without  the  advice  of  its 
counsel,  unless  its  own  officers  are  thoroughly  well  acquainted  with 
the  conditions  which  such  instruments  should  contain,  and  even  then 
it  is  better  to  have  all  instruments  submitted  to  some  lawyer  in  active 
practice,  especially  accustomed  to  papers  of  that  description.  With 
many  trust  companies  in  the  East,  and  with  several  in  the  West,  it 
has  become  a  habit,  and  unquestionably  a  good  one,  to  place  the  con- 
ditions upon  which  the  trust  is  accepted  all  together,  immediately 
preceding  the  article  of  defeasance  frequently  placed  at  the  conclu- 
sion of  the  mortgage  or  deed  of  trust.  I  know  of  no  better  way  of 
placing  concisely  before  you  my  views  upon  the  essentials  required 
in  a  mortgage  or  deed  of  trust  than  to  give  a  substantial  copy  of  the 
conditions  which  are  now  being  recommended  to  trust  companies : 

Article.— The  trustee  hereby  accepts  the  trusts  and  assumes  the  duties 
hereby  created  and  imposed  upon,  and  only  upon,  the  following  terms  and 
conditions,  to  wit : 

First. — The  recitals  of  fact  herein  contained,  and  contained  in  the  bonds 
issued  under  the  authority  hereof,  shall  be  taken  as  statements  made  by  the 
mortgageor,  and  shall  not  be  construed  as  made  by  the  trustee;  and  the 
trustee  shall  have  no  responsibility  as  to  the  validity  of  this  mortgage,  nor  as 
to  the  execution  or  acknowledgment  thereof,  nor  as  to  the  amount  or  ade- 
quacy of  the  security  herein  provided. 

Second.  It  shall  be  no  part  of  the  duty  of  the  trustee  to  record  or  file 
these  presents  as  a  mortgage  of  real  or  personal  property,  or  to  refile,  or  renew 
the  same,  or  do  any  other  act  for  the  continuance  of  the  lien  of  this  indenture 
Of  to  give  notice  of  the  existence  of  the  lien  hereof,  or  to  extend  or  supp 
ment  the  lien  sought  to  be  created  hereby;  nor  shall  it  be  any  part  of  the 
duly  of  the  trustee  to  effect  insurance  against  fire  or  other  damage  to  any 
portion  of  the  property  hereby  mortgaged,  or  to  renew  any  policies  of  fire  or 
other  insurance,  or  to  keep  itself  informed  or  advised  as  to  the  payment  of 
rents,  taxes,  or  of  or  upon  the  mortgaged  premises  and  property, 

or  to   require  the  payment    ol     luch    rents,   taxes,  or   a       sments;    but   the 
mortgageor  shall  and  will  perform  all  arts  above  mentioned  necessary  to  fully 


560  PRACTICAL  PROBLEMS  TN  BANKING  AND  CURRENCY 

protect  the  bonds  described  herein.  The  trustee  may,  however,  in  its  dis- 
cretion, at  the  expense  of  the  mortgageor,  do  any  or  all  of  the  matters  and 
things  in  this  paragraph  set  forth,  or  procure  the  same  to  be  done. 

Third.  The  trustee  may  select  and  employ  in  and  about  said  trusts  and 
duties  suitable  agents  and  attorneys,  whose  reasonable  compensation  shall  be 
paid  by  the  mortgageor,  or  in  default  of  such  payment,  shall  be  a  charge  upon 
the  hereby  mortgaged  property  and  its  proceeds  paramount  to  said  bonds, 
and  the  trustee  shall  not  be  liable  for  any  neglect,  omissions,  or  wrong-doing 
of  any  such  agents  or  attorneys,  reasonable  care  being  exercised  in  their 
selection;  nor  shall  it  be  otherwise  answerable,  save  for  its  own  wilful 
negligence  and  default. 

Fourth.  The  trustee  shall  have  a  lien  upon  the  mortgaged  premises  and 
the  proceeds  thereof  prior  and  paramount  to  the  bonds  issued  hereunder  for  its 
compensation,  reasonable  expenses,  and  counsel  fees,  incurred  in  the  perform- 
ance of  said  trust  powers  and  duties,  or  any  of  them,  and  the  mortgageor 
agrees  to  pay  the  same,  and  the  holder  of  each  bond  issued  hereunder  assents 
to  such  priority  of  lien. 

Fifth.  The  trustee  shall  be  under  no  obligation  or  duty  to  perform  any 
act  hereunder,  or  to  defend  any  suit  in  respect  hereof,  unless  first  idemnified 
to  its  satisfaction ;  nor  shall  the  trustee  be  bound  to  recognize  any  person 
as  a  bondholder  unless  his  bonds  are  submitted  to  the  trustee  for  inspection, 
if  required,  and  his  title  satisfactorily  established,  if  disputed. 

Sixth.  The  exclusive  right  of  action  hereunder  shall  be  vested  in  the 
trustee  until  the  refusal  of  the  trustee  so  to  act,  and  no  bondholder  shall  have 
a  right  to  enforce  these  presents,  or  to  bring  any  action  for  that  purpose, 
until  after  demand  made  upon  the  trustee,  accompanied  by  a  tender  of  in- 
demnity satisfactory  to  it,  and  refusal  of  the  trustee  to  act  in  accordance 
with  said  demand. 

With  reference  to  No.  i,  which  provides  that  the  trustee  is  not 
bound  by  the  recitals  of  fact  contained  in  the  mortgage  or  in  the 
bonds,  while  that  provision  is  properly  inserted,  still  a  trust  com- 
pany should  not  rely  upon  it  to  permit  any  obvious  mis-statements  in 
either  of  the  instruments  referred  to.  They  should  be  critically  and 
carefully  examined  and,  after  that  is  done,  the  trust  company  pro- 
tected by  some  clause  substantially  like  the  one  given  above. 

The  second  paragraph,  as  read,  is  by  no  means  an  invariable  pro- 
vision, because  some  mortgages  or  trust  deeds  do  not  include  any 
insurable  property,  or  do  not  include  property  from  which  it  is  nec- 
essary to  collect  rents.  In  all  cases  the  paragraph  should  be  modified 
to  meet  the  exact  situation  of  the  case.  Certain  it  is  that  no  trust 
company,  for  the  ordinary  compensation,  frequently  fixed  at  one 
dollar  per  bond  or  less,  should  think  of  accepting  the  responsibility 
of  seeing  that  any  chattel  mortgage  is  properly  recorded  or  filed,  or 
kept  recorded  or  filed,  in  accordance  with  the  various  statutes  of  the 


TRUST  COMPANY  SECTION  561 

different  states  where  property  is  liable  to  be  located,  or  to  look  after 
the  collection  of  rents,  or  to  take  the  responsibility  of  placing  and 
keeping  insurance  upon  the  property  covered  by  the  mortgage.  A 
trust  company  may  assume  these  duties,  all  or  any  of  them,  but,  in 
the  event  it  does  so,  such  duties  should  be  assumed  understandingly, 
and  compensation  commensurate  with  the  increased  burdens  and  lia- 
bilities should  be  allowed. 

As  to  the  fifth  paragraph,  which  provides  for  indemnity  to  the 
trustee  before  it  is  obliged  to  act  under  the  mortgage  or  defend  any 
suit  in  respect  thereof,  the  necessity  and  importance  of  such  indemnity 
are  clearly  obvious,  and  work  no  hardship  upon  bondholders  entitled 
to  demand  action  on  the  part  of  the  trustee.  The  fifth  paragraph 
also  provides  that  the  trustee  is  not  bound  to  recognize  any  person 
as  a  bondholder  unless  his  bonds  are  submitted  to  the  trustee  for 
inspection  and  his  title  satisfactorily  established,  if  disputed.  Cir- 
cumstances have  arisen  when  parties  who  were  not  the  rightful  own- 
ers of  bonds  have  made  demands  upon  the  trustee,  and  the  trustee 
has  occasionally  been  placed  in  an  embarrassing  position  because  of 
such  demands,  and  not  having  the  right  under  the  mortgage  to 
require  a  production  of  the  bonds  and  satisfactory  evidence  of  title. 
It  is  the  safe  rule  to  have  the  trust  company  in  a  position  to  require 
of  anyone  claiming  to  be  a  bondholder  the  production  of  the  bonds 
he  claims  to  own  for  inspection  by  the  trustee,  and,  if  ownership  is 
disputed,  to  have  it  satisfactorily  established. 

The  last  paragraph,  providing  that  the  exclusive  right  of  action 
be  vested  in  the  trustee  until  it  refuses  to  act,  presupposes  absolute 
impartiality  on  the  part  of  the  trustee.  It  frequently  happens  in 
practice,  especially  with  respect  to  large  properties,  that  various 
reorganization  committees  are  instituted ;  some  in  the  interests  of 
majority  and  minority  stockholders,  others  in  the  interests  of  majority 
and  minority  bondholders.  Frequently  officers  of  the  trust  company 
which  is  trustee  may  act  as  members  of  these  reorganization  com- 
mittees ;  sometimes  of  more  than  one  of  them ;  and  sometimes  the 
trust  company  itself  may  tvcn  be  the  holder  of  bonds.  But  the 
trust  company,  as  tru  hould  always,  in  good   faith,  act  in  any 

litigation  solely  in  its  capacity  as  trustee,  and  when  so  acting,  clothed 
with  the  right  to  act  primarily,  il  is  able  to  prevent  much  vexatious 
litigation,  sometimes  brought  by  separate  and  individual  bondholders 
36 


562  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

for  delay  and  personal  advantage.  Cases  do  occur  in  which,  over 
the  proceeds  of  property  or  possibly  over  the  property  itself,  contro- 
\  ersies  arise  among  bondholders  of  such  a  character  that  the  trustee 
should  step  aside  and  let  the  bondholders  settle  their  own  differences  ; 
but  cases  of  this  kind  are  exceedingly  rare,  and  instruments  should 
be  so  drawn  as  to  protect,  through  the  trustee,  every  individual  bond- 
holder upon  precisely  the  same  footing,  the  trustee  being  an  agent  for 
that  purpose,  and  clothed  with  full  power  to  control  all  necessary 
litigation. 

Other  provisions  might  be  mentioned  which  are  useful,  but  it  has 
been  the  aim  to  name  simply  those  things  which  may  fairly  be  con- 
sidered essential  for  the  trust  company  to  insist  upon  in  accepting  a 
trust  under  a  mortgage.  Some  mortgages  provide  for  a  majority, 
or  two-thirds,  or  three- fourths  of  the  bondholders  controlling  the 
action  of  the  trustee  in  various  matters,  especially  in  declaring  the 
principal  of  the  bonds  due  on  default,  and  requiring  the  trustee  to 
begin  and  carry  on  or  discontinue  foreclosure  proceedings  under  the 
mortgage.  Such  provisions  are  really  of  more  interest  to  the  bond- 
holders than  to  the  trustee,  but  it  is  an  entirely  reasonable  provision 
to  have  inserted  in  the  mortgage  that  some  majority  of  the  bonds 
should  be  able  to  control  the  maturity  of  the  bonds  in  the  event  of 
default,  and  should  have  a  voice  in  directing  all  litigation  and  pro- 
ceedings brought  by  the  trustee.  Also  the  rights  of  the  mortgageor 
and  the  interests  of  the  various  people  holding  stock  in  the  mort- 
gageor, if  it  be  a  corporation,  must  not  be  lost  sight  of  by  the  trustee. 

Essentials  required  by  trust  companies  to  be  placed  in  instruments 
other  than  mortgages  depend  upon  the  character  of  the  trust  created. 
The  only  safe  rule  is  to  have  every  such  instrument  prepared  or 
approved  by  counsel.  Provisions  which  will  enable  a  trust  company 
to  have  its  accounts  regularly  audited  and  settled  with  someone  au- 
thorized to  act  on  the  part  of  the  beneficiaries  are  useful,  so  that  the 
trustee  may  be  free  to  devote  its  entire  attention  to  carrying  out  the 
wishes  of  the  party  creating  the  trust,  with  the  knowledge  that  its 
conduct  and  administration  of  the  trust  will  never  be  questioned 
after  having  made  its  regular  settlements.  It  should  be  the  uniform 
principle  of  a  trust  company,  with  all  the  essentials  guarded  and  pro- 
tected, so  to  conserve  and  handle  every  trust,  and  at  such  moderate 
and  reasonable  compensation,  that  the  profit  to  the  trust  company 


TRUST  COMPANY  SECTION  563 

will  come  from  the  regular  and  increasing  business  earned  by  its 
record. 


THE  PROPER  CONSERVATIVE  ATTITUDE  OF  TRUST 
COMPANIES   TOWARD  CORPORATE  ENTERPRISES 

ADDRESS  DELIVERED  BY  JOHN  E.  BOURNE,  PRESIDENT  OF  THE  COLONIAL  TRUST 
COMPANY,  NEW  YORK,  BEFORE  THE  AMERICAN  BANKERS'  ASSOCIATION,  AT 
RICHMOND,  VA.,  OCTOBER,    I9OO. 

Trust  companies  have  had  for  years  relationships  with  certain 
corporate  enterprises ;  they  have  acted  as  trustees  in  railroad  and 
other  corporation  mortgages;  as  transfer  agents  and  registrars  of 
stocks  issued  by  such  corporations ;  and  have  performed  various 
functions  which,  being  purely  clerical  and  administrative,  call  for  no 
discretion  in  attitude  or  relationship,  which  latter  consists  largely 
of  a  proper  performance  of  certain  duties.  The  great  industrial 
development,  however,  of  the  past  few,  and  particularly  the  last 
two,  years  has  created  another  field  of  usefulness  and  activity 
for  trust  companies,  and  their  services  have  been  made  use  of 
in  bringing  into  existence  certain  large  corporate  enterprises,  in 
some  instances  new  and  in  other,  by  far  the  greater  number,  the 
result  of  the  consolidating  and  joining  together  of  already  existing 
firms  and  companies.  Here  the  trust  company  may  act  as  inter- 
mediary in  various  ways  :  it  may  become  the  depositary  of  stocks 
and  bonds,  titles  and  equities  of  corporations  and  firms;  the  holder 
of  purchase  moneys  and  payer  of  the  same,  the  collector  of  sub- 
scription moneys  and  issuer  of  new  securities,  under  agreements 
of  consolidation ;  and  it  performs  the  various  and  varying  func- 
tions incident  to  eacb  particular  case. 

Being  thus  brought  into  close  contact  with  an  organization,  it 
becomes  associated  in  the  public  mind  with  its  formation,  and  its 
relationship  with  the  enterprise  is  considered  an  indorsement  of 
the  good  faith  and  probity  of  the  organizers  of  the  same.  It  is 
therefore  of  the  utmosl  importance  that  a  trust  company  should 
in  every  case  thoroughly  satisfy  itself  on  these  points,  and  that  it 
should    decline    any    business    connection    where    these    are    at    all 


PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

doubtful;  otherwise  it  will  lay  itself  open  to  future  criticism  and 
will  be  bound  to  suffer  in  standing.  No  business  function  should 
be  entertained  where  the  least  cloud  exists. 

A  trust  company  should  take  the  same  view  of  a  corporate 
enterprise  that  a  merchant  takes  of  a  customer.  The  shrewd  mer- 
chant first  satisfies  himself  of  the  standing,  both  financial  and  moral, 
of  the  applicant  for  his  merchandise,  and  if  he  is  satisfied  on  both 
points,  he  gives  him  commensurate  credit;  if  he  is  not  satisfied 
on  either  of  the  above  points,  he  will  either  refuse  to  open  business 
connections,  or  will  at  any  rate  limit  them  to  a  strictly  cash  basis. 
The  trust  company  must  take  the  same  view  of  corporate  enter- 
prises. If  their  financial  and  moral  standing  is  excellent,  it  can 
afford  to  lend  them  its  credit ;  if  it  is  not  so,  it  should  not  even  deal 
with  them,  as  the  merchant  does,  on  a  cash  basis ;  it  will  save 
itself  embarrassment  and  criticism  by  not  establishing  business 
connections  with  them.  Being  thoroughly  satisfied,  however,  it 
can  serve  a  corporation  in  many  ways :  it  can  act  as  its  reference 
(and  the  reference  of  a  trust  company  goes  a  very  long  way  and  has 
a  decided  influence  in  the  public  mind,  hence  the  necessity  of  being 
most  careful  in  this  direction)  ;  it  can  bring  it  into  contact  with 
capitalists,  and  it  can  further  its  interests  legitimately  in  various 
directions  without  in  any  way  becoming  sponsor  of  its  ultimate 
business  success.  With  this  it  should  not  concern  itself,  and  it 
should  in  no  sense  ever  become  the  exploiter  of  any  business  or 
the  guarantor  in  any  way  of  its  future  success.  Where  any  other 
course  is  adopted,  the  very  laws  of  chance  will  make  a  trust  com- 
pany at  some  time  or  other  sponsor  for  one  enterprise  out  of  many 
that  will  fail  of  success  or  prove  disappointing,  and  this  will  reflect 
more  seriously  on  it,  and  hurt  its  general  standing  and  reputation 
more  than  it  has  been  benefited  by  the  success  of  the  many. 
Therefore  it  should  not  become  the  exploiter  of  a  corporation's 
future  possible  success.  This  should  be  made  very  clear  by  a 
thoroughly  neutral  attitude.  A  trust  company  should  practically 
say  to  the  public :  "We  know  the  originators  of  this  enterprise ; 
we  are  satisfied  with  their  ability,  responsibility,  honesty,  and  good 
intentions ;  as  to  the  possibility  of  profit  in  the  business,  however, 
that  every  investor  must  look  into  for  himself." 

The  recent  industrial  movement  has  brought  to  the  front  or- 


TRUST  COMPANY  SECTION  565 

ganizers  and  promoters  of  many  classes.  The  responsible,  serious 
one  is  readily  known  as  such  by  his  affiliations.  The  irresponsible, 
obscure  one  makes  up  in  assurance  what  he  lacks  in  the  more  de- 
sirable requisites ;  he  secures  his  clientele  by  representing  himself 
as  more  important  than  he  is ;  he  endeavors  to  secure  the  co-opera- 
tion of  a  trust  company  by  a  generosity  in  prospective  which  has 
behind  it  the  ulterior  motive  of  using  the  company  for  the  purpose 
of  giving  him  a  fictitious  credit  and  standing.  I  have  no  doubt  all 
of  you  are  familiar  with  this  character.  He  has  no  objection  to 
any  charge  you  propose  on  an  issue  of  bonds,  and  considers  any 
figures  you  may  give  him  for  the  performance  of  prospective  serv- 
ices perfectly  satisfactory.  He  makes  with  you  a  tentative  ar- 
rangement, which,  as  he  possesses  no  responsibility,  is  rather  one- 
sided at  best,  and  then  you  find  him  using  your  name  freely  as 
being  behind  him  and  his  particular  enterprise.  His  methods  of 
ingratiation  are  various,  but  they  have  all  one  purpose,  and  only  one 
result  with  regard  to  yourselves.     He  is  to  be  shunned. 

It  therefore  seems  to  me  that  the  proper  conservatism  of  attitude 
of  a  trust  company  toward  a  corporate  institution  lies  in  assuring 
itself  always  of  the  standing  of  its  originators ;  in  not  entering  into 
business  relationship  with  other  than  responsible,  respectable  parties ; 
in  assisting  such  parties  by  vouching  for  them  where  their  standing  is 
assured ;  and  in  taking  no  part  in  exploiting  the  profit-earning  side 
of  any  enterprise.  By  assuming  this  course  it  will  carry  out  the 
functions  which  fall  to  it  logically  in  the  present  era  of  industrial 
development,  namely,  that  of  facilitating  the  formation  of  reputable 
corporations.  Here,  in  order  to  retain  the  confidence  of  the  public, 
its  functions  should  end. 

In  conclusion,  permit  me  to  say  that  in  preparing  this  article  I 
do  so  with  the  knowledge  that  the  business  of  trust  companies  in 
various  portions  of  the  United  States  differs  materially,  and  that 
what  may  be  looked  upon  as  proper  functions  in  one  section  of  the 
1  nion  may  lie  considered  as  cither  too  conservative  or  not  conser- 
vative enough  in  some  other  section.  I  have  the  hope,  however, 
that  the  above  conclusion-,  will  l>c  acquiesced  in  by  the  majority  of 
my  brothers  in  active  trust-company  service,  Tt  seems  to  me  that 
the  position  of  a  trust  company  must  be  like  that  of  C.-csar's  wife — 
above  suspicion;    it   should   in  itself  represent  the   highest   form   "f 


566  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

commercial  and  financial  credit,  and  it  can  do  this  only  by  keeping 
free  from  entangling  alliances  which  may  provoke  criticism  and  in- 
jure its  standing  in  the  community  of  finance. 


THE  BENEFIT  OF  A  REAL  ESTATE  DEPARTMENT  TO 

A  TRUST  COMPANY 

ADDRESS  DELIVERED  BY  LORENZO  E.  ANDERSON,  VICE-PRESIDENT  OF  THE  MERCAN- 
TILE TRUST  COMPANY  OF  ST.  LOUIS,  BEFORE  THE  AMERICAN  BANKERS' 
ASSOCIATION    AT    WASHINGTON,    D.    C,    OCTOBER     10,    IOO5. 

The  trust  company  in  many  states  of  the  Union,  on  account 
of  its  liberal  charter,  is  authorized  not  only  to  do  a  general  banking 
business,  but  also  to  do  everything  or  anything  else  where  bonds, 
stocks,  mortgages,  or  real  estate  enter  into  or  are  part  of  the  trans- 
action; and,  from  my  observation,  very  few  transactions  of  any 
magnitude  are  negotiated  without  real  estate  being  one  of  its  im- 
portant factors.  Take  one  of  the  most  important  departments  of 
a  trust  company,  namely  the  trust  department.  I  say  "most  im- 
portant," because  it  is  the  department  where  trust  in  its  truest  sense 
should  be  exemplified,  as  it  has  the  management  of  estates  for 
widows  and  orphans,  and  it  frequently  happens  that  the  largest 
portion  of  such  estates  consist  of  real  estate.  Then  it  is  that  the 
real-estate  department  is  of  inestimable  value  to  the  trust  company, 
as  every  well-equipped  real-estate  department  should  have  experi- 
enced appraisers,  salesmen,  and  rent  collectors,  of  whose  integrity 
and  ability  there  is  no  question,  and  the  company  thus  avoids  the 
necessity  of  seeking  outside  assistance  in  the  management  of  the 
real  property  belonging  to  such  an  estate.  It  is  through  the  real- 
estate  department,  in  a  majority  of  cases,  that  it  is  possible  for  the 
trust  department  to  secure  the  management  of  such  estates,  because 
when  a  person  makes  his  will,  and  is  possessed  of  considerable 
means,  his  first  consideration  is  to  name  as  executor  of  his  estate 
some  individual  or  corporation  in  whom  he  has  the  greatest  con- 
fidence, and  the  fact  that  the  trust  company  has  managed  his  real- 
estate  affairs  satisfactorily  and  successfully  during  his  life-time, 
and  is  thoroughly  familiar  with  all  the  details  of  his  property,  in- 


TRUST  COMPANY  SECTION  567 

fluences  him  to  a  great  extent  in  selecting  such  company  to  handle 
his  estate  after  his  death. 

The  financial  departmnet  of  the  trust  company  is  benefited  in 
many  ways  by  the  real-estate  department.  For  instance,  when 
money  is  easy  and  the  financial  department  has  a  surplus  of  idle 
cash  on  hand,  the  real-estate  department  can  be  called  on  to  pro- 
cure for  its  investments  in  the  form  of  real-estate  loans ;  and  as 
these  loans  are  made  only  on  a  conservative  basis,  after  the  property 
has  been  inspected  by  men  experienced  in  that  line,  and  approved 
by  the  officers  in  charge  of  the  real-estate  department,  they  can 
again  be  disposed  of  through  that  department  without  any  diffi- 
culty, in  case  it  becomes  necessary  or  desirable  to  do  so. 

The  real-estate  department  is  also  the  medium  through  which 
the  financial  department  secures  a  number  of  depositors.  Take 
the  case  of  an  individual  whose  property  is  sold  through  the  real- 
estate  department.  He  comes  into  the  office  to  close  up  the  trans- 
action, and  the  consideration  is  paid  to  him  in  cash,  or  part  cash, 
and  the  remainder  by  deed  of  trust  and  notes.  It  is  frequently 
only  necessary  to  make  the  suggestion  to  him  that  he  open  an  ac- 
count with  the  company  with  the  proceeds  of  the  transaction,  and 
it  is  very  seldom  that  one  will  leave  the  office  without  doing  so. 
It  is  not  an  uncommon  occurrence  in  the  real-estate  department 
for  a  buyer  to  make  the  cash  payment  on  a  real-estate  deal  by  a 
check  drawn  on  the  company,  and  for  the  seller  to  open  an  account 
with  the  company  by  depositing  the  same  check,  the  company  there- 
by making  a  commission  on  the  sale  of  the  real  estate  and  securing 
a  new  depositor  on  the  same  transaction. 

If,  however,  the  person  desires  to  convert  the  proceeds  of  a 
real-estate  sale  into  an  investment  other  than  real  estate,  he  is 
referred  to  the  bond  department,  where  he  will  undoubtedly  invest 
the  money  in  securities  which  that  department  offers.  Thus  the 
bond  department  is  provided  with  a  new  client,  who,  if  it  were  not 
for  his  dealings  with  the  real-estate  department,  might  never  have 
transacted  business  of  any  character  with  the  company.  The  de- 
posits of  a  successful  real-estate  department  are  in  themselves  a 
considerable  item,  if  it  has  a  large  rent  mil. 

Tn  90  per  cent,  of  all  real-estate  transactions  only  a  part  of  the 
consideration   is  actually  paid   in   cash,  the  balance  being  secured 


56S    PRACTICAL  FROBLEMS  IN  BANKING  AND  CURRENCY 

by  deed  of  trust  and  notes  on  the  property  sold.  The  seller,  there- 
fore, after  the  sale  has  been  consummated,  has  on  hand  a  number 
of  valuable  papers,  which  he  will  desire  to  place  in  a  safe  repository, 
and  as  the  safe-deposit  department  of  the  company  is  so  convenient, 
he  is  certain  to  rent  a  safe-deposit  box  from  that  department.  As 
the  notes  become  due  they  are  placed  with  the  collection  department 
and  the  proceeds  deposited  to  his  account.  In  this  manner  the 
customer  is  enabled  to  transact  all  the  details  of  a  real-estate  deal 
with  one  company,  making  it  convenient  for  him  and  profitable  for 
the  company. 

Then  again  a  large  number  of  people  have  occasion  to  visit  the 
real-estate  department.  Some  of  them  come  in  to  rent  a  house, 
others  to  pay  rent  or  purchase  property,  and  some  to  inquire  about 
real  estate.  Many  of  them  may  not  transact  any  business  at  the 
time,  but  there  is  a  possibility  of  each  person  becoming  a  customer 
at  a  later  date,  by  reason  of  his  remembering  his  former  visit. 
Again,  if  one  takes  into  consideration  its  value  from  an  advertising 
standpoint,  one  can  readily  see  how  beneficial  it  is  to  an  institution 
to  have  a  great  many  people  constantly  entering  and  leaving  its 
building. 

The  trust  company  is  also  benefited  from  an  advertising  stand- 
point by  continually  keeping  the  name  of  the  company  before  the 
public,  through  the  medium  of  the  newspapers,  sign-boards,  and 
rentbills  which  are  scattered  throughout  the  city.  In  the  case  of 
the  Mercantile  Trust  Company  (I  mention  this  company  because 
of  my  knowledge  of  its  affairs),  one  cannot  visit  any  portion  of  the 
city  of  St.  Louis  without  seeing  its  name  on  some  sign  announcing 
property  for  sale  or  lease,  and  every  day  in  the  year  its  name  will 
be  found  in  the  newspaper  for  a  like  purpose.  It  is  needless  for 
me  to  comment  on  the  advantages  of  such  extensive  publicity,  as  it 
brings  the  company  in  touch  with  every  man,  woman,  and  child 
in  the  community  who  may  sometimes  have  occasion  to  transact 
business  with  a  trust  company. 

It  may  not  be  out  of  place  here  to  say  that  the  real-estate  de- 
partment, besides  being  advantageous  to  the  company  of  which 
it  is  a  part,  contributes  in  a  manner  to  the  prosperity  of  the  city 
in  which  it  is  located,  by  promoting  syndicates  for  the  conducting 
of  large  real-estate  enterprises.     The  real-estate  department  of  the 


TRUST  COMPANY  SECTION  569 

company  with  which  I  am  connected  has  organized  corporations 
and  promoted  deals  aggregating  millions  of  dollars.  For  all  of 
these  corporations  it  simply  acted  as  agent,  not  being  interested  in 
any  of  them  as  a  stockholder.  In  other  words,  in  the  promotion 
of  the  syndicates  the  real-estate  department,  or  the  trust  company, 
has  no  direct  interest  whatever  in  the  corporations,  apart  from 
acting  as  agent  for  the  sale  of  property  owned  by  them  for  collect- 
ing rents  on  the  same,  or  performing  the  duties  of  manager  of 
construction  of  office  buildings  or  commercial  structures  being 
erected  by  the  syndicate,  for  which  services  it  receives  commissions 
and  fees.  In  addition  to  this,  it  has  the  placing  of  insurance,  letting 
of  repairs,  and  payment  of  taxes  on  all  such  buildings,  making 
it  necessary  to  handle  large  sums  of  money  and  transact  business 
with  a  great  many  people ;  and  as  a  result  of  these  dealings  a  large 
portion  of  these  individuals  subsequently  become  regular  patrons 
of  the  institution. 

In  the  affairs  of  a  community  the  real-estate  agent  ranks  next 
in  business  importance  to  the  banker.  Real  estate  from  time  im- 
memorial has  been  the  foundation  of  all  values,  and  has  furnished 
more  business  for  different  lines  of  trade  than  any  other  commodity. 
The  iron  foundries,  brick  manufacturers,  lumber  merchants,  certain 
professions,  and  all  mechanics  are  prosperous  when  the  real-estate 
business  is  good.  The  real-estate  agent  is  the  herald  of  progress, 
the  maker  of  villages,  towns,  and  cities,  and  his  efforts  mark  the 
advancement  and  progress  of  municipalities ;  and  any  trust  company 
is  indeed  fortunate  to  have  among  its  departments  a  well-equipped 
and  properly  conducted  real-estate  department. 

In  order  to  be  valuable,  a  real-estate  department  must  be  pro- 
gressive— must  be  competent  to  cope  with  and  carry  to  successful 
issue  the  enterprises  and  deals  of  any  magnitude.  To  do  this,  it 
must  necessarily  attract  capitalists  and  capital  socking  this  avenue 
of  investment ;  and  it  is  a  well-known  fact  that  many  of  the  most 
prosperous  citizens  of  large  cities  invest  only  in  real  estate.  Real 
estate  is  the  investment  which  is  sought  by  many  who  have  made 
their  money  in  other  channels,  and  who.  desiring  to  convert  their 
funds  into  an  investment  which  they  know  to  be  safe  and  which 
will  net  them  a  good  return,  naturally  turn  their  thoughts  to  real 
estate.     The  trust  company,  by  reason  of  its  prominence  and  re- 


570  PRACTICAL  PROBLEMS  IN  RANKING  AND  CURRENCY 

liability,  having  attracted  their  attention,  it  is  through  it  that  they 
make  investments  of  this  character,  if  the  company  has  a  real-estate 
department,  and  it  thus  secures  a  class  of  investors  it  would  not 
otherwise  have  obtained. 

In  summing  up  the  advantages  accruing  to  the  trust  company 
from  a  real-estate  department,  I  would  say  that  it  not  only  benefits 
all  other  departments,  but  is  in  itself  profitable.  As  an  individual 
department,  the  real-estate  department  of  the  Mercantile  Trust 
Company  is  operated  as  a  separate  and  distinct  branch — that  is,  it 
pays  for  all  its  own  advertising,  pays  the  salaries  of  the  officers  of 
the  trust  company  who  have  charge  of  the  department,  as  well  as 
of  all  the  employees  connected  with  the  department,  and  defrays 
all  the  other  expenses  incurred  in  the  conduct  of  the  department. 
It  also  makes  a  monthly  statement  to  the  company,  at  the  same 
time  turning  over  to  it  the  net  results  of  the  month's  business, 
which,  in  1  he  case  of  the  institution  with  which  I  am  associated, 
has  always  been  of  such  a  satisfactory  nature  that  I  am  inclined  to 
believe  that  the  real-estate  department  is  one  of  its  most  valuable 
assets,  as  it  is  not  only  unnecessary  for  the  company  to  invest  any 
of  its  capital  in  any  of  the  transactions  of  that  department,  but 
that  it  is  self-sustaining  and  profitable.  In  my  opinion,  no  trust 
company  is  complete  without  a  real-estate  department,  because  the 
object  of  a  trust  company  should  be  to  take  care  of  everything  that 
comes  its  way.  In  other  words,  it  should  let  nothing  escape  that 
may  result  in  a  commission  or  a  fee ;  and  it  is  my  firm  belief  that  a 
company  is  not  in  a  position  to  do  this  unless  it  has  a  real-estate 
department  as  one  of  its  departments.  Therefore,  I  unhesitatingly 
say  that  every  trust  company  should  have  a  real-estate  department, 
if  for  no  other  reason  than  that  it  will  pay,  if  properly  conducted. 


TRUST  COMPANY  SECTION  571 

THE  SAVING  DEPARTMENT  OF  A  TRUST  COMPANY 

ADDRESS  DELIVERED  BY  THORNTON  COOKE,  TREASURER  OF  THE  FIDELITY  TRUST 
COMPANY  OF  KANSAS  CITY,  MO.,  BEFORE  THE  AMERICAN  BANKERS'  ASSOCIA- 
TION,   AT    ST.    LOUIS,    OCTOBER,    IOOO. 

Oxe  of  the  interesting  features  of  American  finance  in  this  gen- 
eration has  been  the  development  of  trust  companies.  The  trust 
company  has  assumed  the  varied  duties  of  many  separate  institu- 
tions, and  of  different  persons.  It  performs  the  functions  of  a  com- 
mercial bank,  the  real  estate  agent,  and  the  fiscal  agent.  It  acts  as 
trustee,  guardian,  curator,  executor,  administrator,  receiver  and 
attorney ;  so  doing  many  things  formerly  undertaken  only  by  in- 
dividual business  men  and  by  lawyers.  Trust  companies  frequently 
have  savings  departments,  and  these  are  generally  considered  iden- 
tical with  independent  savings  banks.  Forms,  methods,  and  results 
are  indeed  nearly  equivalent,  but  there  are  differences,  and  we  can 
well  spend  a  few  minutes  in  comparing  the  organization,  invest- 
ments, reserves  and  rules  of  trust  company  savings  departments  with 
those  of  savings  banks. 

A  word  upon  some  of  the  advantages  of  trust  company  savings 
departments  may  precede  the  comparison.  Like  other  economic 
aggregations  of  the  time,  trust  companies  are  remarkable  for  econ- 
omy. They  facilitate  the  transaction  of  business  between  what  would 
formerly  have  been  separate  business  houses,  lawyers  and  banks. 
They  concentrate  under  a  single  administration  the  resources  of 
many  classes  of  clients,  depositors,  legatees,  wards,  and  those  who 
trust,  utilizing  these  resources  to  the  fullest  extent,  and  so  deriving 
the  maximum  of  profit  from  the  entire  clientele.  The  contribution 
of  one  department  to  the  general  assets  of  the  company  may  be  a 
modest  one,  but  each  department  enjoys  the  advantage  inherent  in 
large  resources,  and  the  advantage  of  the  company's  administrative 
skill. 

The  savings  deposits  of  a  trust  company  can  be  invested  with 
economy  and  to  great  advantage,  and  the  savings  department  is  a 
constant  feeder  to  the  other  departments. 

The  organization  of  a  savings  department  in  an  old  or  a  new 
trust  company  is  a  matter  of  no  difficulty,  and  at  first  additional  help 
is  not  usually  needed.  The  forms  adopted  will  be  those  in  use  in 
savings  banks,  and  should  be  selected  from  the  compilation  of  thi 


572  PRACTICAL  PROBLEMS  IN  RANKING  AND  CURRENCY 

section.  In  small  companies  one  teller  will  be  able  to  attend  to  the 
counter  business  of  all  departments,  and  there  will  be  no  confusion 
if  the  saving's  deposit  and  withdrawal  forms  are  on  paper  of  differ- 
ent color  from  the  forms  used  by  the  banking  and  trust  companies. 
After  the  business  has  grown  somewhat,  the  task  of  consulting  the 
ledger  and  the  signature  files  as  customers  withdraw  funds  will  inter- 
fere with  the  teller's  attention  to  patrons  with  checking  accounts, 
and  the  bookkeeper  can  verify  signatures  and  balances  for  him.  In 
one  company  that  had  not  as  yet  felt  the  need  of  a  separate  paying 
teller  for  the  savings  department  the  bookkeeper  entered  withdraw- 
als in  the  pass-books,  and  returned  them  to  the  customers,  whom  he 
referred  to  the  paying  teller  for  their  money.  At  the  same  time  he 
initiated  the  withdrawal  tickets  and  dispatched  them  to  the  paying 
teller  on  a  trolley,  such  as  is  used  for  carrying  change  between  sales- 
man and  cashier  in  mercantile  establishments.  The  teller  had  only 
to  pay  to  the  holders  of  pass-books  the  cash  indicated  by  the  tickets 
with  corresponding  numbers.  The  arrangement  was  satisfactory, 
but  with  the  further  growth  of  the  business  separate  tellers  and  book- 
keepers were,  of  course,  required,  and  the  commercial  and  the  sav- 
ings departments  now  come  into  contact  only  as  cash  is  interchanged 
between  them,  and  on  the  general  books  of  the  company. 

Trust  companies  do  not  ordinarily  make  separate  investments 
for  their  savings  departments,  but,  of  course,  the  investing  officers 
have  an  eye  always  to  the  amount  of  savings  deposits.  Ordinarily, 
such  deposits  are  the  most  stable  of  all,  and  in  case  of  excitement 
among  savings  depositors,  there  is  the  right  of  requiring  a  reasonable 
notice  before  making  payments.  It  may,  perhaps,  be  the  policy  of 
a  company  to  invest  its  commercial  deposits  largely  in  business 
paper,  and  to  hold  a  liberal  supply  of  high  grade  bonds,  easily  con- 
verted into  cash  should  the  commercial  depositors  require  their 
funds  in  advance  of  the  maturities  of  the  business  paper  held  by  the 
bank.  Of  the  savings  deposits,  however,  a  large  proportion  should 
be  invested  in  real  estate  mortgages,  which  will  bear  a  higher  rate 
of  interest  than  bonds,  and  the  volume  of  which  can  be  maintained 
more  even  than  the  volume  of  commercial  paper. 

Trust  companies  are  not  under  the  same  restrictions  as  to  invest- 
ments as  are  savings  banks.  There  is  a  savings  bank  law  in  Mis- 
souri, but  no  bank  operates  under  it.     Restrictions  on  investments 


TRUST  COMPANY  SECTION  573 

are  so  severe  as  to  be  impracticable.  The  Missouri  trust  companies, 
however,  carry  savings  deposits  of  more  than  $20,000,000.  Severe 
restrictions  are  not  necessary  for  trust  companies.  The  latter  are 
institutions  with  capital,  and  errors  of  judgment  by  the  investing 
officers  can  always  be  made  up  out  of  the  capital,  leaving  the 
depositors  protected.  I  recall  only  one  or  two  serious  failures  of 
trust  companies.  Most  of  the  savings  banks,  however,  those  hold- 
ing $2,736,000,000  of  the  $3,093,000,000  deposits  reported  by  the 
Comptroller  of  the  Currency,  however  reliable  these  figures  may  be, 
are  mutual  institutions,  and  any  unfortunate  investment  directly 
affects  the  depositors.  The  more  liberal  provisions  for  investments 
have  induced  trust  companies  to  provide  the  facilities  of  savings 
banks  in  localities  where  savings  banks  proper  could  not  have  lived. 

The  reserves  of  trust  companies  are  much  larger  than  those  of 
savings  banks.  According  to  the  last  report  of  the  Comptroller  of 
the  Currency,  the  proportion  of  cash  and  sight  exchange  to  deposits 
in  the  savings  banks  of  the  country  was  6  per  cent.,  and  in  the  trust 
companies  18  per  cent.  The  difference,  of  course,  is  due  to  the 
difference  in  the  character  of  the  businesses.  While  no  trust  com- 
panies, so  far  as  I  know,  apportion  their  reserves  among  their  depart- 
ments, the  reserves  are  generally  fixed  by  their  officers  on  the  sup- 
position that  the  savings  deposits  are  steady  in  character,  and  do  not 
require  the  same  provision  that  must  be  made  for  the  checking  or 
commercial  accounts.  The  laws  of  many  states  are  framed  on  this 
theory.  In  some  companies,  however,  a  different  policy  obtains. 
It  is  feared  that  if  a  panic  should  ever  develop  among  the  savings 
depositors,  it  would  be  persistent,  and  would  result  in  the  with- 
drawal of  a  large  proportion  of  the  savings  deposits.  Accordingly, 
some  companies  carry  heavy  reserves  against  their  savings  deposits 
in  the  form  of  quiet  accounts  with  other  banks,  which  they  expect 
not  to  use  except  to  meet  panic  demands. 

These  companies  would  not  expect  to  apply  the  rule  giving  them 
the  right  to  require  a  certain  notice  of  the  intention  of  the  depositor 
to  withdraw  his  funds.  This  rule  is  universal  in  the  savings  busi- 
ness, whether  in  the  savings  bank  or  in  the  .savings  departments  of 
trust  companies,  and  sonic  hanks  always  apply  it  as  a  matter  of  prin- 
ciple. Tt  enables  them  to  say  definitely  just  what  their  requirements 
will  be  thirty  or  sixty  days  hence,  and  enables  them  to  invest  more 


574    PRACTICAL  rROBLEMS  IN  RANKING  AND  CURRENCY 

closely  than  is  otherwise  possible,  because  all  the  requirements  are 
known,  and  they  have  no  reserves  to  keep  against  uncertainties. 
Trust  companies,  however,  fear  the  effect  of  the  enforcement  of  the 
notice  rule.  It  could  easily  create  alarm  among  savings  depositors 
that  would  be  communicated  to  checking  depositors,  and  it  might 
cause  a  run  that  would  destroy  a  bank  business  built  up  by  half  a 
lifetime  of  skillful  and  conscientious  labor.  If  the  rule  were  applied 
always,  as  it  is  in  many  savings  banks,  its  enforcement  would  require 
constant  explanation  to  all  classes  of  depositors,  and  might  be  mis- 
construed by  them.  The  checking  customer  might  not  be  able  to  rid 
himself  of  the  impression  that  the  enforcement  of  the  rule  was 
occasioned  by  a  continuous  shortage  in  the  company's  supply  of 
cash,  and  many  such  an  one  would  be  inclined  to  transfer  his 
account  to  a  bank.  Many,  knowing  the  existence  of  such  a  rule 
would  never  open  their  accounts  with  a  trust  company  in  the  first 
place. 

The  question  of  applying  the  rule  even  in  case  of  a  run,  is  by  no 
means  simple.  At  first  thought  it  seems  like  advertising  to  deposit- 
ors with  checking  accounts  that  the  company  is  short  of  cash  to  meet 
the  demands  upon  it.  It  is  the  experience  of  some  companies,  how- 
ever, in  case  of  a  run  beginning  in  the  savings  department,  that 
checking  customers  have  early  withdrawn  their  balances,  fearing 
that  the  entire  available  resources  of  the  company  would  be  used  in 
paying  off  savings  depositors.  Such  customers  have  sometimes 
redeposited  immediately  upon  the  application  of  the  notice  rule  to 
savings  accounts,  and  many  trust  company  officers  believe  it  well  at 
the  first  sign  of  a  run  in  the  savings  department  to  apply  the  rule,  so 
assuring  checking  depositors  that  their  cash  requirements  for  legiti- 
mate business  will  have  precedence  over  the  unreasoning  demands 
of  frightened  savings  depositors. 

It  is  open  to  question  whether  savings  depositors  are  really  more 
liable  to  fright  than  are  checking  depositors.  In  the  nature  of 
things  there  can  be  no  statistics  upon  the  question.  The  former  are, 
on  the  average,  less  educated  than  are  the  latter.  Many  of  them 
are  children  and  irresponsible  youths.  Perhaps  they  take  fright  more 
easily  than  men  and  women  with  checking  accounts.  You  recall 
the  run  on  the  Pullman  Loan  and  Savings  Bank  last  month,  because 
the  cashier  requested  an  Italian  workman  to  provide  identification, 


TRUST  COMPANY  SECTION  575 

and  the  run  on  the  Hibernia  Savings  and  Loan  Society  of  San 
Francisco,  for  which  no  reason  whatever  could  be  found.  Once 
frightened,  however,  there  is  little  to  choose  between  the  man  with 
the  savings  book  and  the  man  with  the  check  book. 

The  whole  question  of  investments  and  reserves  for  the  savings 
department  of  a  trust  company  depends  upon  the  company's  peculiar 
circumstances.  The  officers  of  the  company  will  have  regard  to  the 
considerations  just  outlined,  to  the  character  of  the  patrons  of  all 
departments  of  the  company,  to  the  economic  and  sociological  con- 
ditions of  its  territory,  and  to  the  strength  and  disposition  of  its  cor- 
respondents. 

Trust  companies  advertise  far  more  widely  than  do  savings  banks, 
and  the  transaction  of  savings  business  by  mail  is  practically  confined 
to  the  former.  It  would  be  interesting  to  know  how  the  trust  com- 
pany and  the  savings  bank  fare  in  direct  competition  for  savings  de- 
posits. Unfortunately  statistics  are  at  this  point  only  fragmentary. 
There  is  no  report  of  the  total  savings  deposits  in  trust  companies. 
Deposits  of  all  kinds  in  trust  companies  were  reported  last  year  by 
the  Comptroller  of  the  Currency  to  be  $2,164,000,000.  Savings  de- 
posits in  savings  banks  were  nearly  $1,000,000,000  more.  We,  of 
the  trust  companies,  shall  not  force  you  out  of  business  yet  awhile. 

The  trust  company  has  been  successful  as  a  savings  bank,  and 
successful  in  general  largely  because  it  has  undertaken  this  function. 
The  customers  of  the  savings  department  have  found  their  way  into 
all  the  departments.  Some  have  become  patrons  of  the  bond  or 
investment  department,  but  not  many,  because  most  of  them  have 
been  saving  for  homes  or  to  go  to  school,  or  to  go  into  business^ 
Some  have  found  their  way  into  the  safe  deposit  department  to  put 
away  the  title  and  papers,  and  the  insurance  policies  on  the  homes 
their  savings  have  bought.  Very  many  have  left  the  savings  depart- 
ment for  the  checking  department,  as  their  savings  have  enable! 
them  to  begin  some  little  business.  With  the  prestige  of  large 
capital,  and  of  large-  business  in  other  departments,  trust  compani 
have  developed  the  savings  business  and  fostered  the  savin-'-  habit 
where  neither  had  been  known  to  any  extent. before,  and  the  officers 
of  trust  compai  tltl         n,  arc  proud  to  claim  their  share  with 

you  in  the  development  of  thrift  and  financial  independence  in  the 
American  citizen. 


$-6    PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

THE  ADVANTAGE  OF  OPERATING  SAFE-DEPOSIT 
VAULTS    IN   CONNECTION   WITH    THE   TRUST 

COMPANY 

ADDRESS  DELIVERED  BY  WILLIAM  A.  CARR,  SECRETARY  AND  TREASURER  OF  THE 
UNION  SAFE  DEPOSIT  COMPANY,  PITTSBURG,  BEFORE  THE  AMERICAN  BANKERS' 
ASSOCIATION,  AT   RICHMOND,  VA.,  OCTOBER,    UJOO. 

The  trend  of  the  times  in  business  life  is  toward  combination, 
the  bringing  of  all  auxiliary  lines  around  a  main  business.  The 
"department  store,"  so  arranged  and  furnished  as  to  enable  the  pur- 
chaser to  make  all  his  purchases  under  one  roof,  and  to  save  him 
time  and  annoyance  in  using  his  credit  in  a  number  of  business 
houses,  is  a  striking  illustration.  The  same  principle  operated  in 
the  "department  store"  applies  and  with  equal  advantage  to  a  "trust 
company." 

The  strictly  up-to-date  trust  company  under  its  corporate  power, 
is  given  an  opportunity  to  make  itself  indispensable  to  large  classes 
of  a  community  inside  and  outside  of  the  business  world.  It  can 
avail  itself  of  this  opportunity,  as  the  department  store  does,  by 
grouping  around  its  main  business  all  its  auxiliary  lines  of  business 
under  the  direction  of  bright,  progressive  managers. 

Some  trust  companies  make  a  specialty  of  a  particular  work  and 
give  no  attention  to  the  department  policy ;  but  these  companies  are 
not  following  the  trend  of  the  times,  as  we  have  earlier  seen  it  to  be. 
In  a  well-organized  trust  company  there  are  departments,  and  of 
various  kinds.  These  departments  are  needed  for  the  convenience 
of  the  customer,  will  be  appreciated  by  him,  and  will  tend  to  fix  him 
in  the  permanent  list  of  customers.  One  of  these  departments  pop- 
ular with  the  customer  and,  we  may  add,  profitable  to  the  company, 
is  the  safe-deposit  department.  As  an  illustration :  A  customer  of 
the  banking  department  desires  to  purchase  bonds.  His  relations 
with  the  banking  department  have  been  satisfactorily  and  fully  es- 
tablished. He  is  introduced  to  the  manager  of  the  bond  department, 
and,  dealing  with  him,  he  makes  selection  and  purchase  of  certain 
bonds.  It  happens,  however,  as  is  often  the  case,  that,  for  conveni- 
ence in  making  deliveries  or  sales,  he  desires  to  have  a  safe  place  in 
which  to  deposit  his  bonds,  instead  of  registering  them.  The  bond 
department  manager,  learning  his  wish  and  need,  now  introduces 
him  to  the  manager  of  the  safe-deposit  department.     The  plan  of 


TRUST  COMPANY  SECTION 


577 


boxes  in  that  department  is  submitted,  and  he  makes  a  selection 
suitable  to  his  requirements.  Then,  upon  his  signing  a  contract  for 
the  use  of  his  box,  the  key  thereof  is  delivered  to  him,  and  his  bonds 
are   deposited  therein. 

There  is,  we  admit,  little  direct  profit  in  the  safe-deposit  depart- 
ment when  run  on  a  small  scale,  but  the  indirect  profit  of  keeping 
your  customer  in  the  house  may  be  considerable.  And  while  the 
box  rent  may  be  small,  a  fair  profit  will  likely  accrue  from  the  sale 
of  the  bonds. 

The  fundamental  principle  in  business  is  in  keeping  your  cus- 
tomer— making  him  feel  satisfied  that  you  are  doing  the  best  that 
can  be  done  for  his  interests  under  all  the  circumstances.  When 
once  he  has  favored  you  with  his  patronage,  if  you  have  the  depart- 
ments needed  to  accommodate  his  requirements,  and  in  each  of 
such  departments  his  interests  are  carefully  handled,  he  will  remain 
with  you,  and  the  net  results  of  his  business,  running  through  the 
various  departments  accommodating  him,  will  likely  be  important. 

There  are  many  women  customers  in  these  times,  and  their 
number  is  constantly  increasing.  They  especially  prefer  to  have 
their  safe-deposit  boxes  with  the  company  that  transacts  their  trust 
or  banking  business.  They  can  deposit  their  coupons,  notes,  col- 
laterals, or  other  securities  in  the  banking  department  for  collection, 
and  thereby  save  time,  risk,  and  the  inconvenience  that  attends 
transacting  business  at  several  places.  The  guard  of  the  safe-de- 
posit department  should  be  particular  in  his  attention  to  the  ladies, 
saving  them  as  much  trouble  as  possible.  He  should  see  that  their 
boxes  are  carefully  inserted  in  the  proper  space  in  the  safe-deposit 
vault,  and  when  removed,  carry  them  to  the  coupon  rooms.  These 
little  attentions  are  gratefully  received,  and  not  only  do  much  toward 
making  the  renters  of  boxes  feel  that  their  patronage  is  appreciated, 
but  lead  them  to  tell  their  friends,  and  so  to  become  active  agents 
for  the  company  in  soliciting  new  business.  The  manager  of  one 
of  the  large  trust  companies  in  New  York  recently  said  that  they 
had  many  renters,  both  men  and  women,  having  no  one  to  assist 
them  in  their  money  matters,  who  would  frequently  have  the 
guard  in  charge  help  them  cut  their  coupons  and  arrange  them  in 
envelopes  for  deposit  in  the  banking  department  of  that  company. 

The  first  safe-deposit  company  in  the  city  of  Pittsburg  was  or- 
37 


578     PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

ganized  in  the  year  1867.     Since  that  time  there  have  been  at  least 
ten  additional  ones  established,  including  banks  which  rent  boxes. 

As  to  the  style  of  locks  for  safe-deposit  boxes,  it  is  very  desir- 
able to  have  double  locks  with  two  escutcheons.  Many  of  the  renters 
suppose,  when  the  guard  places  his  key  in  the  same  escutcheon  they 
use,  that  he  has  access  to  the  boxes.  This  is  a  mistake,  and  the  im- 
pression should  be  avoided  as  far  as  possible.  The  guards  and 
managers  of  the  safe-deposit  department  should  be  careful  to  see 
that  the  renters  properly  replace  their  boxes  in  their  own  compart- 
ment. 

As  to  general  powers  of  attorney  granting  admission  to  safe- 
deposit  boxes,  they  should  specifically  set  forth  that  the  attorney  in 
fact  has  authority  to  open  the  box ;  for,  while  some  companies 
consider  a  general  power  of  attorney  sufficient  authority,  others 
insist  that  a  specific  power  be  given  granting  that  privilege. 

The  advertising  for  the  safe-deposit  department  should  be  kept 
up  continuously,  and  should  be  of  a  rich,  neat,  and  attractive  charac- 
ter.    Of  course,  you  do  not  get  immediate  results   from  your  ad- 
vertising.    It  is  like  the  farmer  sowing  his  seed ;    he  has  to  wait 
until  the  seed  finally  develops  into  the  crop,  and  this  means  that  he 
will  reap  his  harvest  perhaps  a  year  afterward.     This  law  applies 
as  well  to  the  advertising  of  the  safe-deposit   department  and  of 
all  the  other  departments  of  a  large  trust  company.     One  of  the 
prominent  merchants  of  Philadelphia,  at  one  time  having  occasion 
to  increase  his  credit,  sent  his  credit  man  to  New  York  to  see  Mr. 
A.  T.  Stewart  concerning  the  granting  of  a  larger  line.     The  credit 
man  admitted  that  the  profits  made  by  his  concern  were  not  suffi- 
cient for  the  amount  of  business  done,  and  upon  this  admission  the 
additional   credit   was  declined.     The  principal  of  the  house  then 
went  to  New  York  to  obtain  if  possible  the  desired  credit,  meeting 
with   the   same   result.     Later   he    requested   a   personal    interview 
with  Mr.  Stewart  who  at  first  also  declined  to  grant  him  further 
credit ;    but  when,  upon  considering  his  claim,  Mr.  Stewart  asked 
him :    "How  much  money  did  you  pay  for  advertising  last  year  ?" 
and    received    the    answer,    "Ninety-four    thousand    dollars"    Mr. 
Stewart  said :   "Add  this  to  your  profit  for  last  year  and  it  shows 
you  a  very  handsome  return."     As  the  result  of  this  new  light  on 
the  situation  Mr.  Stewart  said :  "You  can  have  the  additional  credit. 


TRUST  COMPANY  SECTION  579 

You  will  not  begin  to  realize  until  this  year  the  benefit  from  the 
money  you  paid  last  year  for  advertising."  This  is  true  of  trust 
company  advertising.  A  great  deal  of  missionary  work  is  done 
from  which  no  returns  are  received  for  one,  two,  and  in  some  cases 
three  years.  But  by  careful,  judicious,  and  persistent  advertising  fair 
results  are  sure  to  come,  if  you  have  facilities  for  taking  care  of 
the  business,  and  if  you  treat  your  customers  politely  and  handle 
their  business  with  care. 

The  safe-deposit  department  should  be  made  as  attractive  as 
possible.  Some  of  these  places  are  very  dismal  looking.  Last 
summer  when  in  London  I  visited  one  which  was  so  gloomy  that 
it  reminded  me  very  much  of  a  dungeon,  with  its  heavy  grates  and 
bars  and  its  dim  lights.  The  largest  safe-deposit  department  I 
have  ever  seen  is  that  in  connection  with  the  Credit  Lyonnais  in 
Paris,  this  one  department  covering  four  floors.  It  is  four  stories 
under  ground,  all  the  different  entrances  are  carefully  guarded,  and 
all  the  renters  are  carefully  examined  as  they  pass  in.  The  safe- 
deposit  boxes  are  in  large  cupboards,  and  each  of  these  cupboards 
in  turn  has  a  variety  of  assorted  boxes,  so  that  it  is  impossible  to 
get  into  more  than  one  compartment  at  a  time. 

In  ordering  safe-deposit  boxes  for  a  company  it  is  difficult  to 
decide  on  the  sizes  to  place  in  the  vault,  as  the  demand  varies.  The 
proper  way  is  to  buy  them  in  sections  and  sort  them  up  to  suit  the 
demand. 

One  of  the  most  successful  novelties  which  we  use  in  advertis- 
ing our  safe-deposit  department  is  a  small  tin  box  in  which  renters 
can  collect  their  diamonds,  jewelery,  etc.,  and  place  in  their  safe- 
deposit  box.  We  have  sent  out  2,500  of  them  and  have  met  with 
the  best  results 


58o    PRACTICAL  PROBLEMS  IN  RANKING  AND  CURRENCY 
TRUST    COM  TAN  Y    ADVERTISING 

ADDRESS  DELIVERED  BY  RICHARD  L.  CRAMPTON,  ASSISTANT  CASHIER,  NATIONAL 
BANK  OF  THE  REPUBLIC,  CHICAGO,  BEFORE  THE  AMERICAN  BANKERS'  ASSOCIA- 
TION,   AT    RICHMOND,   VA.,  OCTOBER,    igoo. 

Occasionally  one  finds  a  man  who  says  that  it  is  not  good  busi- 
ness ethics  for  trust  companies  to  advertise.  The  average  man  will 
admit  they  may  advertise.  The  officers  of  most  companies,  I  be- 
lieve, think  they  should  advertise.  The  signs  of  the  times  say  they 
must  advertise — that  is,  if  increasing  dividends  are  desired.  By 
advertising  I  mean  the  broader  definition — all  that  goes  to  make 
favorable  publicity. 

Many  of  the  older  trust  companies  have  established  reputations 
in  their  respective  cities  which  keep  on  bringing  new  business  to 
them  three  hundred  and  sixty-five  days  in  the  year,  but  even  they 
must  let  the  growing  generations  of  this  advertising  age  know  that 
an  up-to-date  business  is  still  being  done  at  the  old  stand.  The 
newer  trust  companies,  particularly  those  in  the  West,  where  the 
functions  of  a  trust  company  are  only  beginning  to  be  understood, 
must  make  an  advertising  investment  for  the  business  of  ten  or 
twenty  years  in  the  future. 

Perhaps  in  no  business  can  good  advertising  be  considered  as 
favorably  in  the  light  of  an  investment  as  by  trust  companies  doing 
the  usual  estate  business.  The  estate  of  a  person  who  to-day  is 
favorably  impressed  with  the  stability  and  business  policy  of  a 
trust  company  sufficiently  to  name  it  as  executor  and  trustee  in  his 
will  may  not  become  a  trust  for  many  years,  and  while  the  results  are 
a  long  way  off,  the  companies  which  are  making  the  best  impression 
upon  the  public  to-day  through  their  advertising  will  later  on,  other 
things  being  equal,  reach  greater  results  than  those  which  do  not 
advertise. 

The  question,  then,  is  as  to  the  best  methods  of  advertising. 
This  will  always  be  a  matter  of  opinion.  One  man  holds  tena- 
ciously to  a  style  which  another  regards  altogether  wasteful,  if  not 
absolutely  injurious.  Someone  has  said  that  advertising  is  one  of 
the  modern  wonders.  The  established  principles  are  certainly 
of  a  very  general  character,  and  the  secrets  are  hard  to  discover. 

Each  company  should  have  someone,  preferably  an  officer,  to 
attend  to  all  advertising  matters,  at  least  so   far  as  relates  to  the 


TRUST  COMPANY  SECTION  581 

general  policy,  in  order  that  he  may  be  brought  to  study  more  care- 
fully the  latest  methods  of  reaching  the  people.  I  say  ''preferably 
an  officer"  for  the  reason  that  I  believe  it  will  greatly  promote  the 
best  interests  of  the  company  to  have  someone  in  authority  who 
appreciates  the  importance  of  the  subject,  understands  the  policy 
of  the  institution,  and  is  on  an  equal  footing  with  those  whom  he 
can  consult  with  greater  advantage  than  can  an  employee  or  an 
outside  advertiser. 

The  duty  of  creating  new  business  is  certainly  of  as  great  im- 
portance as,  and  more  difficult  than,  merely  executing  the  business 
in  hand,  and  should  receive  corresponding  attention.  I  have  been 
unable  to  learn  of  a  single  instance  where  professional  advertisers, 
not  familiar  with  trust  company  business,  have  been  able  to  give 
satisfactory  results  unaided.  I  can  see  no  reason  for  this  except 
that  their  point  of  view  has  been  greatly  biased  by  their  experience 
in  handling  advertising  to  sell  goods.  Trust  companies  do  not  have 
goods  to  sell.  They  simply  are  giving  publicity  to  their  stability, 
their  methods,  and  their  terms.  In  all  of  this  the  personal  equation 
is  the  largest  factor.  It  is,  then,  largely  a  matter  of  impressing  the 
public  favorably  with  the  personality  of  the  management,  without 
seeming  to  do  so. 

The  public  knows  an  institution  through  its  advertising.  There- 
fore it  should  be  absolutely  of  the  best.  If  the  person  in  charge 
of  it  is  unfamiliar  with  the  subject,  he  will  do  well  to  call  in  one 
of  the  best  advertisers  he  can  find  as  an  assistant,  expecting  to  pay 
him  well  for  his  services.  But  I  believe  it  is  necessary,  in  order 
to  obtain  good  results,  to  study  the  situation  independently,  and 
in  a  large  measure  to  act  independently  of  his  advice.  First  of  all 
study  the  constituency  carefully  and  its  point  of  view.  Different 
localities  and  different  constituencies  require  very  different  methods. 
If  it  is  expected  to  get  the  money  back  that  is  invested  in  adver- 
tising, with  a  fair  percentage  in  addition,  it  is  essential  that  the 
details  "f  the  matter  receive  such  careful  attention  that  they  may  be 
considered  as  being  almost  on  a  scientific  basis.  Belter  not  adver- 
tise if  you  cannot  do  this. 

ich  company  has  one  or  two  strong  talking  points,  or  at  least 
it  should  have.  The  company  with  which  I  have  the  good  fortune 
to  be  connected  has  probably  one  of  the  best  boards  of  directors 


5Sj  practical  problems  in  banking  and  currency 

of  any  similar  institutions.1  It  is  composed  of  well-known,  leading 
business  men,  who  are  active  in  the  interests  of  the  company. 
Naturally  prominence  is  given  to  this  fact  in  our  advertising.  It 
is  also  well  known  that  our  policy  is  progressively  conservative; 
hence  we  are  careful  not  to  do  anything  to  disabuse  the  public  of 
this  opinion.  If  we  had  a  fine  building  of  our  own,  we  certainly 
should  let  the  public  know  it,  as  such  a  building  is  undoubtedly  a 
good  investment  from  an  advertising  point  of  view,  implying,  as 
it  does,  permanence. 

I  am  more  and  more  impressed  with  the  fact  that  we  are  best 
advertised  by  our  ''loving  friends,"  and  that  no  expenditure  can 
brine  as  eood  results  as  that  which  will  secure  the  class  of  officers 
and  employees  who  will  make  a  favorable  impression  upon  the 
public  with  whom  they  come  in  contact.  Disregard  of  the  atten- 
tions properly  due  a  customer,  or  one  who  may  be  asking  for 
information,  costs  an  institution  a  great  deal  more  than  the  time 
which  should  have  been  expended.  This  is  particularly  true  of 
financial  business ;  and  yet  how  often  one  notices  want  of  courtesy 
on  the  part  of  those  connected  with  such  institutions ! 

The  most  common  form  of  advertising  is  through  the  publica- 
tion of  the  quarterly  statements  called  for  by  the  state  authorities. 
It  is  surprising  that  so  many  of  these  statements  are  so  cheaply 
gotten  up.  If  an  excuse  for  advertising  is  necessary,  certainly  here 
is  the  excuse,  and  it  should  be  worked  for  all  it  is  worth.  At  least 
once  a  year  the  statement  should  be  issued  in  an  especially  attrac- 
tive booklet  form  and  made  to  cover  fully  all  the  features  of  the 
business. 

Booklet  advertising  is  very  desirable  for  trust  companies,  and 
should  receive  careful  attention.  Let  the  cover  design  be  done  by 
the  best  artist  obtainable,  in  a  simple,  strong,  and  direct  style,  em- 
bodying, if  possible,  some  distinctive  marks  which  may  become 
known  as  belonging  to  the  company,  using  it  as  a  sort  of  trade- 
mark. Good  designs  cost  money  and  are  worth  it.  The  same  can 
be  said  of  good  paper  and  printing.  Make  everything  about  a 
booklet  as  good  as  the  gold  you  are  trying  to  get  in  trust,  and  I 
believe  it  will  pay. 

'At  the  time  of  this  address  Mr.  Crampton  was  with  the  Northern 
Trust  Company  of  Chicago. 


TRUST  COMPANY  SECTION  583 

The  most  important  contribution  to  trust  company  literature  is 
Mr.  Breckinridge  Jones's  paper  on  "The  Trust  Company  Ques- 
tion,"' which  has  been  used  extensively  all  over  the  country  and  must 
have  brought  results  when  printed  properly.  It  is  difficult  to  under- 
stand how  some  of  the  companies  which  printed  Mr.  Jones's  paper, 
in  the  poorest  manner  possible  could  have  expected  to  make  a 
favorable  impression  and  get  any  returns. 

Every  trust  company  should  issue  at  least  one  fine  booklet,  cover- 
ing in  detail  the  different  features  of  the  business  which  it  trans- 
acts. This  can  be  supplemented  by  smaller  and  less  extensive 
booklets  on  the  different  features  taken  separately.  For  example, 
one  on  "Acting  as  Trustee  under  Wills,"  others  on  "Trust  Agree- 
ments for  the  Management  of  Property,"  "Estates  of  Minors  and 
Incompetent  Persons,"  "Registration  and  Transfer  of  Capital 
Stock  of  Corporations,"  "Relating  to  the  Appointment  of  a  Cor- 
porate Trustee  under  Mortgages  to  Secure  Bond  Issues,"  and 
under  other  titles  which  will  suggest  themselves.  If  banking, 
surety,  title,  or  safe-deposit  departments  are  conducted  by  the  com- 
pany, each  should  have  its  separate  literature,  all  preferably  in  the 
same  uniform  and  distinctive  style.  To  get  the  best  results  from 
such  direct  advertising  matter  requires  a  carefully  prepared  mailing- 
list.  The  names  and  addresses  should  be  placed  on  cards  showing 
the  business  connection,  standing,  etc.,  of  each  individual,  and  with 
a  place  for  noting  the  advertising  sent  out  from  time  to  time.  Mail 
the  general  booklet  with  a  carefully  worded  personal  letter,  and  if 
any  inquiries  result,  note  the  fact  on  the  address  card  and  send  the 
particular  booklet  which  fits  the  case.  If  no  results  are  obtained 
in  a  reasonable  time,  a  letter  of  reminder  will  not  be  out  of  the 
way.  If  the  party  is  making  his  will,  the  result  of  the  advertising 
may  not  be  known  until  his  death,  years  later. 

Remember  always  that  cheap,  careless,  and  sensational  advertis- 
ing unconsciously  impresses  ihe  recipient  with  the  idea  that  the 
company  using  it  has  the  same  characteristics. 

Many  trust  companies  favor  the  use  of  novelties,  such  as  letter- 
openers,  pocket-books,  etc.,  the  value  of  which,  considering  their 
large  cost,  I  believe  is  greatly  overestimated.  Frequently  T  have 
asked  persons  who  had  such  advertising  souvenirs  if  they  knew  the 
name  of  the  firm  on  them,  and  the  answer  has  been  very  often  in  the 


584  PRACTICAL  PROBLEMS  IN  BANKING  AND  CURRENCY 

negative,  although  the  name  had  been  before  their  eyes  every  day. 
If  such  things  can  have  some  relation  to  the  trust  business,  and  be 
presented  in  a  very  personal  way  with  attractive  printed  matter,  their 
value  is  greatly  increased. 

About  three  years  ago  I  wished  to  increase  the  business  of  our 
safety  vaults,  which  were  not  doing  well,  and  hit  upon  the  idea  of 
sending  out  handsomely  lithographed  metal  boxes,  one-quarter  the 
size  of  a  safety  box.  In  these  I  inclosed  a  will  envelope  and  some 
advertising  matter  suggesting  that  valuable  papers  be  put  in  the  box 
and  returned  to  the  vault  for  safe-keeping.  The  details  of  the 
scheme  were  carefully  worked  out,  with  the  result  that  we  got  our 
money  back  several  times  over  the  first  year  and  are  still  getting 
results,  making  it  necessary  greatly  to  increase  the  number  of  boxes 
in  our  vaults.  The  idea  has  been  adopted  by  a  large  number  of  other 
companies.  Several  of  these,  however,  say  they  have  not  had  as 
much  success  as  we  did.  Perhaps  some  details  were  omitted  which 
were  essential,  or  the  local  condition  may  have  been  different 

This  year,  to  advertise  our  general  business,  which  includes  a 
banking  department,  we  issued  a  new  form  of  daily  memorandum 
calendar  with  different  reading-matter  for  nearly  every  day.  This 
gave  a  splendid  opportunity  for  going  into  the  details  of  our  busi- 
ness and  of  keeping  our  name  promptly  before  the  users.  These 
were  sent  principally  to  attorneys — who,  by  the  way,  can  do  more 
to  influence  trust  business  than  almost  any  other  class  of  people. 
Another  trust  company  in  Chicago  issues  each  year  for  attorneys  a 
very  convenient  pocket  diary  in  which  information  concerning  the 
courts  is  printed.  Another  company  gets  out  a  pocket  directory  of 
Attorneys  with  telephone  numbers  and  court  rules.  Things  of  this 
kind  can  be  of  great  service,  as  they  come  into  daily  use. 

Newspaper  advertising  is  valuable,  and  one  is  tempted  to  act  upon 
the  principle  that,  if  a  little  is  desirable,  a  large  amount  will  bring 
proportionate  results ;  or,  if  it  is  a  good  thing  to  advertise  once  a 
week,  it  will  be  seven  times  better  and  quicker  to  advertise  daily. 
If  this  reasoning  is  followed,  the  advertising  appropriation  will  soon 
equal  the  income  account.  I  believe  it  is  better  to  treat  this  class  of 
advertising  as  part  of  the  necessary  auxiliary  methods,  and  to  use 
relatively  small  spaces,  say,  once  or  twice  a  week.  In  some  local- 
ities it  may  be  advantageous  as  an  educator  to  use  reading-matter  in 


TRUST  COMPANY  SECTION  585 

the  news  columns,  in  order  that  the  public  may  come  to  know  and 
fully  appreciate  the  functions  of  trust  companies,  and  it  would  seem 
well  that  companies  in  the  newer  fields  divide  the  expense  of  such 
publicity. 

I  will  say,  in  closing:  Beware  of  the  numerous  schemes,  special 
editions,  programs,  and  things  of  this  character  which  are  so  fre- 
quently presented,  are  of  no  special  value,  and  are  a  considerable 
expense  in  the  aggregate.  Better  leave  them  alone  entirely.  Re- 
member to  plan  your  advertising  in  advance  if  possible,  and  not  leave 
it  to  be  done  on  the  spur  of  the  moment.  Also  that  trust-company 
advertising  must  have  something  in  it  which  is  more  than  mere 
cleverness,  and  that  you  must  at  all  times  have  a  clear  understanding 
of  the  point  of  view  of  the  possible  client  and  follow  the  lines  of 
least  resistance. 


INDEX 


142,   143. 


143,     144- 


Accountants,    expert. 

demand    for,    6. 

examinations    by,    94,    95-97,    '00. 

profession    of,    11. 

qualifications    and    functions    of,    59-62. 

See    also    Accounting,    Examinations. 
Accounting,    4,    94-95.    97- 

See   also   Accountants,   experts. 
Administrators.     See    Fiduciaries. 

See    also    Trustees,    powers   of   attorney 
from. 
Advertising,    financial. 

banking  by  mail,    145-146. 

department    for    conduct    of, 

direct    method,     137,     143-145. 

expenditures    for,    141-142. 

general    advertising,    i35-i37> 

general    discussion    of,    134,    141. 

of    trust    companies,    575,    578-579.    580- 

585. 
personal    equation    in,    140. 

psychology   of,    142-143. 

tracing   results    of,    138-140. 
Alabama,    statute    of    on    promissory    notes, 

126. 
Aldrich    banking    bill,    372. 
American      Banker,      on      over-speculation, 

339- 
American    Bankers'    Association. 

advocate  of   negotiable   instruments  law, 

132. 
currency-reform    plan    of,    401-405,    426- 

432. 
property  statement   blank  of,  44. 
Argentines,     importation     of     manufactures 

by   the,    19. 
Asset    currency,    forces    working    for,    296- 
297. 
in   branch   banking,   249. 
meaning   of   term,   290. 
method    of    establishing,     296. 
not  a  remedy   for   stringency,    169,   399. 
notes   of   failed   banks,  under,   366-368. 
provisions    for    discussed,    268,    305-307, 

345-346,     363-364.     407-410. 
some   objections  to    discussed,  265,    338- 

339.   341-343- 

soundness  of,   297-299. 

under  Fowler  banking  bill,  291-296,  311. 

under    present   banking    system,    254. 
Assignments,   538-539.   54'- 
Auditing.     See    Examinations. 


framcr    of    branch 


by,    19. 
manufac- 


Auerbach,    Joseph    S., 

banking   law,   285. 
Australia,    gold    mining    in,    378. 
importation    of    manufactures 
Austria-Hungary,     commerce     in 
tures,     19. 
gold    money    of,    379. 
mortgage   banks   in,    481-482. 
uncovered    circulation    of.    170. 
See  also   Austro-IIungarian   Bank,    Bank 
of    Austria. 
Austro-Hungarian   bank,    issues   of,   203. 
Autumn    drain,    178. 


Bagehot,    Mr.,    on    management    of    banks, 

179. 
Balfour,   J.    Spencer,   effort   of   to   establish 

English    trust    company,    479. 
Baltimore,    failure    of    trust    companies    in, 

476. 
Baltimore    plan    of    currency    reform,    304, 

344. 
Bank   credits. 

by  classes  of  manufacturers,   50-53. 
credit   science. 

development  of,   43-45. 
future    of,    54-55- 
present    state    of,   45-47- 
summary,    55. 
test  of  borrowing  customer,   56. 
See    also    Credit,    Credits,    Loans. 
Bank    defalcations,    57-58,    87-97,     118-119. 
Hank    deposits.     See    Deposits. 
Bank    Directors,    examinations    by,    58,    59, 
61. 
loans   to,   74. 

responsibility     and     duties 
101,    102-105,    118-119. 
Banker,     American,     extension 

commerce   by,    18. 
Bankers    and    investors,    identity    of    inter- 
ests,   3. 
Bankers    and   Wall    Street,    identity    of   in- 
terests,   3. 
Bankers'    cash    notes,    123. 
Bankers,     functions     and     qualifications    of, 
66-67,    68,    7i-74.    76-77.    78-79,    83,    161- 
162,    364-370,    430-431- 
on   purchase   and   coinage   of   silver,    190. 


of,    94,    95, 
of     foreign 


586 


INDEX 


587 


Bankers'      Magazine,     on     over-speculation, 
34o. 
on  Quigley  bond   forgery,   502. 
Bank     examinations.     See     Examinations. 
Bank    failures,    causes    of,    7,    74,    81,    88, 
162,    300-301,    477-478. 
statistics   of,    164,   256. 
See  also   Bank    defalcations. 
Banking   capital,    37-43. 
Banking    laws. 

as  preventives  of   panics,    163,    164,    165- 

167. 
changes    in    discussed. 

as   to   asset   currency,    237. 

as  to  branch   banking,  224-227,   230. 

as  to    federated   bank   plan,    230-233, 

236. 
as    to    reserves,    225. 
evolution   of  the,   121-133. 
needed   reform   of,   219. 
of    Canada,    241-242. 
of    England   and   Scotland,    212-214. 
of    Iowa,    115,     116,    117. 
of   Massachusetts,   299-300. 
present   conditions   in    U.    S.,    125-133. 
regulating   reserves,    213. 
restricting    note   issues   of   banks,    300. 
summary   of   the    past,    121-125. 
Banking   methods,    3-15. 
Banking    power    of    the    United    States    and 

the    world,    136-137.   458.    439- 
Banking    privileges,    defined    as    once    used, 

300. 
Bank    notes    as    an    emergency    circulation, 

316.    393-394- 
character  of,   235. 
different    views    of    discussed,    184,    376- 

377- 
essential    requisites   of,    364. 
functions   of,    183,    319-320,    407. 
guaranty    fund    for,    363,    364,    421,    431. 
not   available   as    reserves,   368-369. 
of    failed    banks,    366. 

tatc    banks,    465. 
recent   history  of,   359-362. 
recent    increase    in    circulation,    449450. 
redemption     of,     321-323.     368,     369-370, 

420,    431. 
relation    of    to    checks,    418-420,    429-430. 
soundness  of,   420-421,  429. 
uncleanncss    of,     377. 
unsecured   issues  of,    182. 
See    also    National    bank    notes,    United 
States    currency. 
Bank    of    Austria,    203,    332. 
Bank   of    Belgium,    203,   332. 
Hank    of    England,     168-170,    203,    312-214, 

228,    301,    309,    330,    408-409. 
Bank     of     France,     169-170,     203,     259-260, 

297.    330-331.    408-409,    419,    487-4RP. 
Bank    of    Montreal,    239-240,    241,    247. 
Bank   of   Norway,    332. 
Bank   of    Scotland,    203. 


Bank  of  the  Netherlands,  203,  332. 
Bank    officers,    defalcations    of,    87-92. 
duties   of,    57-58,   62,    104,    105. 
loans   to,    74-75. 
Bankruptcy.     See    Fiduciaries. 
Banks,    chief    sources    of    prosperity,    16-17. 
functions    of,    38. 

liability    as    to    trust    funds,    548-552. 
relations    of    to    trust    companies,    33-34, 

489-490,    491-492,    494. 
See    also     Commercial    banking,     Finan- 
cial    banking,     National     banks,     Sav- 
ings banks,    State   banks. 
Bank    statement    discussed,    33-34. 
Barings'   failure,  the,   212,  217,   338. 
Bayard,    Senator,   on    payment   of   bonds    in 

greenbacks,    194. 
Beck,     Senator,    on    payment    of    bonds    in 

greenbacks,     194. 
Belgium,   commerce   in   manufactures,    19. 
uncovered   circulation   of,    170. 
See   also    Bank    of    Belgium. 
Bills  of  exchange,   evolution   of,    123-124. 

legal  status  of,  128-129. 
Black    Friday    conspiracy,    the,    296. 
Bland    law,   the,   229. 
Bolles,     Prof.      Albert     S.,     on     basis     for 

credit,  9. 
Borrowers'    statements   as   basis   for  credit, 

44-49.    50-53- 
Borrowing,    real   meaning  of  the   term,   207- 

208.     See    also    Loans. 
Branch    banking,    advantages    of,     182,    239- 
241,    249-250,    270-271,    276-277. 
as  distribution   agency   for   parent  banks, 

249,    266. 
by  national   banks,   189. 
definition   of   term,   254-255. 
experience    of    other    countries    in,    251- 

252,    257-260. 
experience  of  U.   S.    in,   256-257. 
favored     by     New     York     Chamber     of 

Commerce,    406. 
general    discussion,    238-239. 
in  connection   with    panics,    169,  277-278. 
legal  cash   reserves   under,   239-247,   248. 
objections   considered,    250-254. 

discrimination     between     cities,     263- 

264. 
higher    interest    rate,    279. 
menace    to    free    institutions,    265. 
monopoly,    250-253.   260-265,    273-27^,, 

304-305- 
proposed     system     partially     inoj 

tive,    275-276. 
revolutionary     character     of     Fo ,     g 
bill,    272-273,   2K_-. 
plan     of     Corn     Exchange     Bank,     Nc 

York    City,    284-289. 
I'll1  !■>     attitude    toward,    233. 
.  cotch   system    of,   jit. 
system     with     central    bank     for    U.     S., 
219. 


588 


INDEX 


Brooklyn     Eagle,    the,    on    Quigley     bond    | 

forgery,   503-  . 

Bros.us.  Representative,  effort  of  regard- 
ing   certain    national    bank    loans,    74. 

Bryan,    Mr.,    fear    of    election   of,    187. 

Bullion    report   of    1S10.    168,    328. 

Bureau  of  Commerce  and  Labor,  on  prices 
in    U.    S.    since    1897.    44*. 

Bureau    of     Statistics,    Monthly     Summary 

of,    451- 
Business    education,    address    on,    3-1 5- 
Business    failures,    68-69. 
Business,    management    of,    4- 
Butler,    General,    on    payment   of   bonds    in 

greenbacks,    194. 


California,    195.    328,    3/8-379- 
Canada,    banking    system    of,    218,    257-258, 
264,    266,    273.    275.    282,    296,    309. 
312,     329-330.     334.     34i.     363.     4o8, 
419. 
bank   issues  in,  203. 
bank-note   guaranty   system   in,   200. 
bank    reserves   of,    241-242. 
banks    of,    241-242.    243.    247,    250,    251- 

252,    253. 
importation    of    manufactures,   by,    19- 

trust  companies   in,   478. 
Cannon,    James   G.,   clearing   house    defined 

by-  29S-  ,.       jo 

Capital,    meaning  of   term  discussed,   43»- 

Carlisle,  Secretary,  plan  of  for  banking 
reform,   304. 

Cash    credits,    259- 

Certified  public  accountants.  See  Ac- 
countants,   expert. 

Chamber  of  Commerce  (New  York).  See 
New   York    Chamber   of    Commerce. 

Chartered    accountants.      See    Accountants, 

expert. 
Chase,      Secretary,      National      Bank      act 

recommended   by,    229. 
Checks,    function    and    importance    of,    122. 
law   relative   to,   in    U.    S.,    13*- 
origin    of,    123. 
regulations    of    to    bank    notes,    418-420, 

429-430. 
Chemical  National  Bank  (New  York  City), 

86,   201. 
Chicago,  as  a  central   reserve   city,   225. 
financial    position    of,    337- 
I  national   banks   and   trust   companies   in. 

458. 
so  eed    of    branch    banks    in,    253-254- 

ago    Banker,    the,    on    effects    of    over- 
sc  .eculation,    340. 
uicago    Clearing    House,    337- 
Chicago    Economist,    the,    on    over-specula- 
tion,   339-  ,  .t.  . 
China,    depreciation    of    national    securities 

in,   459- 


Civil    War,    financial    situation    during    the, 

190,     194.    *95.    229. 
Clearing     house     certificates,     I74-I75.     "90. 

232-234,    283,    303.    319.    336-337.    399- 
Clearing   houses,  410,  4U.  4'2- 

See    also    New    York    Clearing    House. 
Clerical    force    of    banks,   75,   88,   9'"95- 
Cleveland,    40,    i45-'46. 
Cleveland,  President,  action  by  on  financial 

situation,    294,    383. 
Clouston,     E.     S.,     on     Canadian     banking 

system,   273,    275. 
Collaterals,    convertibility    of,    24,    36. 

See   also    Loans,    Securities. 
Commercial    agencies,    ratings    by,    68-69. 
Commercial   and   Financial   Chronicle,  cited 

as    to    over-speculation,    339-340. 
Commercial    assets,    as    basis    for    currency, 

13- 
See  also   Asset  currency. 
Commercial    banking,     functions    of,    23-25. 
207-209. 
importance    of,    424-426. 
in    financial    crises. 

in    England    and    Scotland,    211-214, 

216-217. 
in  United   States,    209-211. 
note    vs.    deposit    liabilities    in,    299-301. 
payment   of   interest   on   deposits,    77-82, 

87. 
reserve   requirements  in,    166. 
sound    system    of,    217-222. 
statistics   of,    25. 
See  also    National  banks. 
Commercial    Crises.     See    Financial    crises. 
Commercial    methods    discussed,    3-T5- 
Commercial    paper,    change    in    method    of 
buying   and    selling,    45- 
co-operation    in    handling    of,    67-69. 
excess    of,    under    present    banking    sys- 
tem,    249. 
in   New  York  City  since    1897,  442-443- 
See   also   Collaterals,    Negotiable   instru- 
ments,   Securities. 
Community  of   interest   plan,   226. 
Comptroller      of      the      Currency,      attitude 
toward    loans    by    national    banks    to 
officers    thereof,     74- 
character  and  requirements  of  the  office, 

98,     112-113.     "9- 
control     of     over     emergency     currency, 

306-307. 
on    bank    examinations,     58-59,     109-110. 
on    bank    failures,    164. 
on     national     bank     resources,     210-211, 

242,    298-299- 
on    savings   banks,    573- 
on  taxes  paid  by  national  banks,   154- 
substitute    for   office    of,   236. 
Conant,    Mr.,    on    national    bank-note   guar- 
anty   fund,    199-200. 


INDEX 


589 


Connecticut,    banking   system    of,    199,   366- 

367- 

Republican     Convention     of,    on     U.     S. 
currency,    413-414. 
Conservatism    in    banking,    82-87. 
Consumers    and    bankers,    identity   of    inter- 
ests,   3. 
Corporate     enterprises.     See      Corporations. 
Corporations,    publicity    in    affairs   of,    4-6. 

public   prejudice    against,    5. 

relations    of   trust    companies    with,    563- 
566. 
Credit,   basis    of   modern   business,   3,    324. 

basis  of   our   financial   system,   381-382. 

borrowers'    statement    as    basis    for,    8-9. 

elasticity    of,    7,    38-39,    42-43,    439-440. 

European  requirement   for,  9. 

function    of.    24-25. 

importance   of   in   England,   480. 

information   as   basis   for,   7. 

meaning    of    term    discussed,    206-207. 

part  played  by  in  making  of  prices,  435- 

437- 
See   also    Bank   credits,   Loans. 
Credit    accounts,    38. 
Credit   departments   of  banks,   46,    47. 
Credit    Fonder,   484,   487. 
Credit    Lyonnais,    260,    486,    579. 
Credit   money,    38. 
Credit    science.     See    Bank    credits. 
Credits,     swapping     of,     208-209,     210-212, 

214,   216,    219. 
Criminal   law,    lax   enforcement   of   the,   88, 

92,  93-94.    108. 
Crop    movements,    267,    296,   313,    316,    325, 

376,    398,    417-418,    419-420,    431. 
Currency,    definition    of    term,    435. 
Currency    systems    of    Europe.     See    Euro- 
pean   currency    systems. 
Currency,      United      States.     See      Uniud 
States    currency. 
See    also     Bank     notes,    National    bank 
notes. 
Currrnt    funds,    129. 
Cycles   in    business,    448. 

Dawes,     Hon.     Charles    G.,    on    asset    vs. 
emergency   currency,    306. 

on  business   bank   accounts,    38. 

on    dividends    of    failed    banks,    200-201. 

on   expert   bank   examinations,   96. 

on    legal    bank    reserves,    243,    245. 

on    loan   limit   of   national    banks,    161. 
Defalcations.     See     Bank     defalcations. 
Delaware,    failures    of    trust    companies    in, 

476. 
Democratic    party,    the,    in    recent    bond-ex- 

tension    emergency,     370-371. 
Denmark,    uncovered    circulation    of,    170. 
Deposits,   as   bank    obligations,    322. 

as    index    of    approaching    crises,    177. 


Deposits — multiplication     of    under     present 
system,  244-245. 
real   nature   of,   207-208. 
recent   increases    in,    450. 
relation   of   to   loans,   208. 
in  national  banks,  210-21 1,  469,  470,  471. 
fluctuations    of,    3S6-357. 
insurance   of,    149-162. 
in    trust    companies,    459,    465-466,    468- 

469,   483.   567- 
See  also   Trust   funds. 

Depression,    defined,    176. 

Dill,    James    B.,    on    publicity    in    corpora- 
tions,   5. 

District    of    Columbia,    trust    company    leg- 
islation  for,    468. 

Dividends,   general    policy   as   to,   82-87. 

Draft,    bank,    function    of,    122. 

Dunbar,     Prof.     Charles     F.,     on     national 
banking    system,    274. 

Eckels,   Hon.   James   H.,   on  branch   banks, 
273-274. 
on    commercial    assets,    13. 
on  expert   bank  examinations,   96. 
on    financial    situation     (1903),     151-152. 
Edmunds,     ev-Senator,     member    of     Mone- 
tary    Commission     of     Indianapolis     Con- 
vention,   188. 
Emergency     currency,     302-307,     399,     401- 

405- 

See   also    United    States    currency. 
Endorsers,   65. 
England,  banking  laws  of,  212-214,   545-546. 

commerce    of    with    the    Orient,    20-21. 

contrasted      with      U.      S.      in     financial 
methods,    480-481. 

credit   operations   in,   480. 

development  of  commerce  by,   18,  20-21. 

evolution    of    branch-banking    system    in, 

25»- 

financial    strength   of,   219-222. 

material  conditions  in,  452. 

source   of   our   banking    laws,    122-123. 

See     also      Bank      of      England,      Great 
Britain,    United   Kingdom. 
English    system    of    accounting,    95. 
European     countries,     asset     currency     in, 
290. 

lack  of   trust   companies    in,    478,   479. 

requirements  for  credit  in,  9. 

Scotch   banking  system  adopted   by,   217. 
European    currency    systems,    168-172. 

See   also    names    of    count  ries. 
Examinations,   by  bank   officials,    56-62. 

by    expert    accountants,    58,    59-60,   61-62, 

94,    95-97.    104- 
failures  prevented   by,   88. 
of    national    banks — 

aim   and   purpose  of     107-108. 


5<X> 


INDEX 


Examinations — character     of,     88,     97-101, 
108-110,  117,  492. 

reforms    needed    in,    101-105. 
of    trust    companies,    489-496. 
shortcomings    of,    57-58. 
Executors.     Sec    Fiduciaries,    Trustees. 

Failures.     Sec       F.ank      failures,      Business 

failures. 
Fiduciaries,    537-54 1- 
Fillmore,      Hon.      Millard,      on      bank-note 

guaranty   fund,    199. 
Finance,   art   of   defined,   26. 

compared    with    speculation,    35-36. 
Financial       banking,       distinguished       from 

commercial    banking,    25-31. 
Financial    crises,   condition    of   U.    S.    banks 
in,    238. 
conditions    leading    to,    209-211,    307-308. 
in   England   and    Scotland,   213-214,   217. 
nature   and    causes  of,    175-179. 
palliatives    for,     177-178. 
present    outlook    for,    179-180. 
situation    in    1902,    448. 
Sec  also  Panics. 
Financial    Record,  on   Lewis  bond   forgery, 

503- 
First  National   Bank,   New  York   City,   170. 
Fish,     Stuyvesant,     member     of     Monetary 

Commission    of    Indianapolis    Convention, 

188. 
Foreign   banks,    necessity   for,    20. 
Foreign   commerce,    15-23,    447. 
Foreign   countries,  branch   banking  in,  260. 
Foreign   exchange,    15. 
Foreign    fiduciaries.     See    Fiduciaries. 
Foreign    trade.     See    Foreign    commerce. 
Forgan,    Mr.,    on   grain    and    provisions    as 

collateral,    24. 
Fowler    banking    bill,    290,     291-296,    298, 

304-305,    3H-3«4.    329-339- 
Fowler,   Congressman,  advocate  of    Indiana 
and      Louisiana      banking      systems, 

333-334- 
author  of   Fowler   banking  bill,    304. 
in    debate    on    asset    currency    question, 

'73- 
on   emergency   circulation,    402. 
on    Fowler   bill,    272-273. 
on    interest    rate    in   U.    S.,    338-339. 
on    Scotch    and    French    asset    currency, 

330-331- 
Frame,    Mr.,    on    branch    banking,    250-251, 

252. 
France,    branch    banking    In,    264. 
commerce  of  in    manufactures,    19. 
currency   system   of,    338. 
depreciation    of    national    securities    in, 

459- 
general    financial    conditions   in,    185. 
gold  money  of,  379. 


France — material    conditions    in,    452. 
system   of   loans  in,   387. 
trust    company    analogues    in,    482-488. 
Sec      also      Bank     of      France,      Credit 
Foncier,    Credit    Lyonnais. 

Gage,    Hon.    Lyman    J.,    on   bank   reserves, 
166,   336. 
on    defective    methods   in    banking,    7. 
on  form  of  bank  credits,  419. 
on  the  currency  question,   230-233,   236, 
364,    414. 
Gambling.     See   Speculation. 
Germany,  banking  system  of,  264,  301,  303, 
481-482. 
commerce    of,    18,    19,    20,   2t. 
currency   system  of,   338. 
depreciation    of    national    securities    in, 

459- 
financial    condition    of,    185. 
financial   system  of,   341,   387. 
gold  money  of,  379. 
material   conditions    in,   452. 
technical   and   industrial   training   in,    10. 
See  also    Imperial   Bank  of   Germany. 
Georgia,    trust   companies   in,    476. 
Gilchrist,     Mr.,     on     strength     of     Scotch 

banks,   217. 
Gilman,     Mr.,     framer     of     banking-reform 

bill,    304. 
Gold,  as  bank   reserves,   319,  374,  443. 

as    the    basis    of    U.     S.    currency,    327- 

328,    338,    378-380,    396-397,    423- 
demand    for   in  the  arts,   437. 
international    clearing    house     for,    410- 

412. 
recent  production   of,    180. 
U.    S.    Treasury    reserve    of,    344-345. 
See     also     Gold     certificates,     standard, 
Gold  supply. 
Gold   certificates,    228,    362,   374,    375,    414- 

415- 
Gold    Exchange   Bank,   296. 
Gold   mining,   443-446. 
Goldsmiths'    notes,    123. 
Gold  standard,  act  of  establishment  of,  230. 

development  of,  382-384,  415,   422. 

maintenance  of,   188,   195,  278-279. 

universality   of,   433. 
Gold   supply,   the,    future    rate   of    increase 
of.    443-446- 

popular   fallacies  as  to,   443-444. 

recent  increase   in,  329,  434,   449. 

relation   to  of  interest  rate,    437-443. 

relation  to  of  prices,   434-437,   439.   443- 
Government     bonds.     See     United     States 

bonds.     See  also   Public   debt. 
Great    Britain,   banking   power  of,   282. 

branch  banking  in,  253,  264. 

currency  system  of,   168,  338. 

depreciation   of   national   securities,   459. 


INDEX 


591 


Great   Britain — financial   condition   of,    185. 

gold    money    of,    379. 

gold    standard   adopted   Tjy,    327. 

See    also,    Bank    of    England,     England, 
Ireland,    Scotland,     United    Kingdom. 
Greece,   332. 
Greenbacks,    character    of,    228-229. 

injurious  effects  of,    190. 

recent  changes   in,   374. 

retirement    of    76,    237,    296,    319,    344- 
345- 

under  Fowler  banking  bill,  291-295. 

See    also    National    bank-notes,    United 
States   currency. 
Oresham  law,   the,   326,   327,   330. 
Guardian.     See    Fiduciaries. 

Hamilton,  Alexander,  author  of  branch 
bank    system,   242. 

Hardwick,  Lord,  on  delegation  of  author- 
ity   by   trustees,    546. 

Hay,  C.  C,  bank  statistics  furnished  by, 
346. 

Hill,    Congressman    E.    J.,   261-263,  413-414- 

Hill  on  Trustees,  on  employment  of  agent 
in    ministerial    acts,    543. 

Holt,  Sir  John,  opinion  ot  on  promissory 
note,    124. 

Illinois,   banking  system   of,    191,   329,   450, 
467,  468. 
savings   banks   of,   465. 
state  banks  of,  203. 
Imperial    Bank   of   Germany,    170,    203,   235- 

236,    260,    331,    365-366,    372,    419. 
Imperial    Bank  of    Russia,   332. 
Indiana,    failure    of   trust  company   in,   477. 
state   banks   of,    202,   203. 
See  also   State   Bank   of   Indiana. 
Indianapolis        Conv     tlon.       See        Indian- 
apolis   Monetary    Commission. 
Indianapolis      Monetary      Commission,      on 
bank    failures,    7. 
personnel   and   work  of,    187-190. 
plan    of    for    banking    reform,     iio-in, 
198,    200-201,    268-270,    290,    298,    301- 
302,   304,    367-368. 
Interest    on    commercial    deposits,    77-87. 
Interest  rate,  as  affected  by  asset  currency, 
338-339- 
as   affected   by   increase   in    gold    supply, 

437-443- 
as   index   of   approaching   crisis,    177. 
as   preventive   of   undue   expansion,    341, 

342. 
fluctuations   in,    336,    406-407. 
importance    of    uniformity   in,    221. 
in    Knglish    banks,    in    panics,    212. 
regulation   of,    166,   409. 
under  branch   banking  system,   271,   279. 
International    clearing    house,    380. 


Investments.     See    Loans. 
Iowa,   banking   laws  of,    199. 

politics  in  bank  matters,    1 19. 

private    banks,   vs.   state    banks   in,    115. 
Ireland,   asset   currency   in,   290. 

banks   of,    330. 
Italy,    large    banks    in,    332. 

Jackson,    Andrew,    and    the    national    bank 
system,    218-219. 
refusal    of    to    re-charter    Bank    of    the 
U.   S.,   238. 
Japan,    depreciation    of    national    securities 
in,  459- 
importation    by    of    manufactures,    19. 
Jefferson,    on    government,    222. 
Jevons,      Professor,      cited      on      monetary- 
science,    171,   327. 
Joint    ownership    of   banks,    226-227,   232. 
Jones,     Breckinridge,     on    trust     companies, 

582-583. 
Journal    of    Commerce,     the,     cited    as    to 
over-speculation,   339. 

Kansas,  banks  of,  281. 

promissory    notes    in,    127,    130,    13 1. 

trust  companies  in,   477. 

trust    funds    in,    550-552. 
Kansas   City,   banks  of,   282. 
Kentucky,   promissory  notes   in,    126. 

state   banks  of,   202. 
Kilburn,    Superintendent,    statistics   of  trust 

companies    furnished    by,   473. 
Koch,    Herr,    on    sound    financial     system, 
372. 

Lacy,    Comptroller,    on    losses    by    national 

bank    depositors,    153. 
Laughlin,    Prof.    J.    Laurence,    member    of 
Monetary      Commission     of      Indian- 
apolis   Convention,     188. 
author   of   report   of  Commission,    188. 
on    branch   banks,    274. 
Lawson,    W.     R.,    on    cause    of    currency 

troubles,    340-341. 
Legal   tender,    182,    183,    184. 
Lewis,   Z.   T.,   bond   forgery   by,   503. 
Lincoln,   Abraham,   credit   rating   by,   68. 
national  bank  act  recommended  by,  229. 
on   the   national    currency,    179. 
Lloyd,     Horace,      on      insurance     of     bank 

deposits,    151. 
Loans,   as   an    index    of   approaching  crises, 
»77- 
character    of    international    banks,    469- 

470,   471. 
convertibility     of,     32-33,     36. 
increase   of  under  branch    banking,   243. 

249. 
limitation    on    amount    of,    165,    167. 
of    trust    companies    not     regulated     by 
law,    463. 


592 


INDEX 


Loans — on   commercial    paper,    50-53. 
n   municipal  bonds,   501. 
rate    of    interest    on,    8o-8i. 
relation    of    bank    expenses    to,    263. 
relation   of   to   deposits.    jo8. 
relation   of    to   specie,    177-178. 
renewals,    65-66. 

requisites     for     soundness,     66-77. 
securities   for    discussed,    6.2-66. 
to  bank  officers,  88,  91,  94. 
to    reserve    agents,    40. 
under    State    Bank    of    Indiana    system, 

333- 
Sec    also     Borrowers'     statements,     Col- 
laterals,   Securities. 
London,    as   a    financial    center,    338,   441. 

branch  banks   in,    253. 
London    Chamber    of    Commerce,    on    com- 
mercial   employment    of    foreigners,    10. 
London      Economist,     on     Great     Britain's 

coin    reserve,    169. 
Louisiana,   banking    system   of,   332,    333. 

trust    companies    in,    476. 
Lovering,     Representative,    author    of    cur- 
rency-reform  measure,   290,   304. 


McAshan,     Mr.,    on    branch    banking    and 

asset  currency,   265. 
McCullough,  Hugh,  on  panic  of  1837,  201. 
McCurdy,      R.      H.,      connection      of      with 

branch    banking    law,    285. 
Maine,   failures  of  trust  companies  in,   475. 
Manufactures,     in     the     world's     commerce, 
18-19. 
in  the  U.    S.,  53-55.  447,   45*- 
Maryland,     failure    of    trust    companies    in, 

476. 
Massachusetts,   banking   laws   of,    313,    525- 
526. 
banking     power     of,     282. 
banking   system   of,   299-300,   329. 
Medium    of    exchange,    205,    227-228. 

See  also  Money. 
Michigan,    banking    laws   of,    191. 
banking  system  of,   191. 
state  banks  of,  203. 
Mill,  John   Stuart,  on  financial  crises,   175- 
Minnesota,   banking   laws  of,    129,   191. 
banking    system    of,    467. 
failure    of    trust    company    in,    477. 
state   banks  of,    101,   202. 
Mississippi,   trust    companies   in,   476. 
Missouri,    promissory    notes    in,     126,     128, 
129,    130,    131. 
trust    companies    in,    572-573. 
Monetary    system    of    U.    S.,    general    dis- 
cussion   of,    381-382. 
See    also    National    banks,    Public    debt, 
United    States    bonds,    United    States 
currency. 


Money,   explanation   of  the  term,   206,  227, 
228,    434-435- 
fundamental    principles    of,    328. 
world's    stocks   of,    328-329. 
See   also    Medium   of   exchange. 
Money   supply   of   the    United    States,    307- 
314- 
See  also    United    States   currency. 
Montreal,     Bank    of.     See    Bank     of    Mon- 
treal. 
Morgan    Life    Insurance    banks,    New   York 

City,   36-37- 
Morse    on    Banks    and    Banking,   on    banks' 
responsibility     as     to     depositor's     checks, 
551-552- 
Mortgage    banks,    481-482. 
Mortgages,    65-66,    557-562. 
Morton,    Governor,    on    payment    of    bonds 

in    greenbacks,    194. 
Mulhall,    on    banking    power    of   U.    S.    and 

Europe,   282. 
Municipal    bonds,    adequate    protection    for, 

505-507- 
as    investments,    501-502. 
element    of    danger    in,    501-505. 
Municipal     governments     business     methods 

of,    4. 
Municipal     ownership     and     corporate     pub- 
licity, 6. 
See    also    Public    utilities,    Supervision 
and   Publicity. 

National  Association  of  Credit  Men,  blanks 

for   borrowers  adopted  by,   44. 
National    bank    act,    96,    1 19-120,    165,    167, 

191      196,    462. 
National      Bank      examinations.     See      Ex- 
aminations. 
National    bank    examiners,    development   of, 
106-107,    111-112. 
fee   system    for,    102. 
politics    in    connection    with,    1:9. 
work    of,    107-111. 
See  also   Examinations. 
National  banking  system,  character  of,  228- 
229. 
history  of,   280-282. 
improvement   of,    14. 
merits  of   discussed,    279-282. 
shortcomings   of,    308. 
See    also    National    bank    act,    National 
bank    currency,    National    banks. 
National     bank     currency,      action     on     of 
Indianapolis    Monetary    Commission, 
187-190. 
circulation,     191-192,     267-268,    400. 
false   basis  of,  405-406. 
natural    bank     currency    as    alternative, 

196-198. 
origin    and    growth    of    present    system, 
191-192,    192-196. 


INDEX 


593 


National     bank     currency — redemption     of, 
408,    409-410. 
security    for,    12,    198-202,    407-408. 
soundness  of.  314-315. 
tax   on,   400. 

total   issues  of   failed   banks,   407-408. 
See      also       National       banks,       United 
States    currency. 
National    bank    notes.     See    National    bank 

currency. 
National    Bank    of    Commerce,    New    York 

City,    170. 
National    Bank   of   1  enmark,   332. 
National     Banks    as    depositories    of    public 
funds,    184,    185,    407,    412-413,    415- 
417- 
balance    due    from    banks,    243-244. 
capital    of,    299. 
condition  of   illustrated,   40. 
deposits   in,    242,    386-387,    450. 
elasticity    of,    383. 
expansion    t>f     powers     necessary,     464, 

470-471- 
failures    of,    477. 

issues  of,    341,    407,   417-421,   428-432. 
limitations    of,    462-464,    469-471. 
loans  and   discounts,   75-76,   451. 
recent  development   of,   450,  464,  465. 
relations    of    to    trust    companies,    460- 

461,    462-464,    469,    470-471. 
soundness    of,    383,    452-453- 
under     American     Bankers'     association 

currency    reform    plan,    401-405. 
See    also    National    Bank    act,    National 
Bank    currency,     National     Bank     ex- 
aminers. 
National   City    Bank,   New    York   City,    170. 
Nebraska,   banks  of,   280. 
Negotiable  instruments,   121-133. 
Netherlands,     commerce     in     manufactures, 
io- 
uncovered    circulation    of,    170. 
See  also    Bank  of  the   Netherlands. 
New    England,   banking  system  of,   370. 
banks   of,    256,   263,    332,    465. 
failures  of  trust   companies  in,  475-476. 
See  also  under  State  names  and  Suffolk 
Bank   system. 
New   Jersey,    trust   companies   in,  476,   552. 
right     of     trustee     in,     to     act     through 
agent,  544. 
New    Mexico,    trust    companies    in,    477. 
New    York    Chamber    of    Commerce,     339, 

418,   426-432. 
New    York    City,    as   a    central    redemption 
city,   370. 
as    a    financial     center,     170,    338,    343, 

406. 
as   a   reserve   city,    33-34,   36,    225. 
banks    of,    41,    43,    313,    217,    218,    261, 
*63.    313-314- 


New  York  City — branch   banking  in   253. 
interest-bearing   debt    of,    460. 
trust    oempanies    in,    553-554. 
See    also    New    York    Clearing    House, 
New     York     Stock     Exchange,     Stock 
market,   Wall   Street. 
New    York    Clearing    House,    227-228,    233- 
234,  282-285,  409- 
See     also     Clearing    House     certificates. 
New    York    Evening    Post,   on    over-specula- 
tion,   340. 
New   York  Financier,   the,   on  over-specula- 
tion,   339. 
New  York  money  market,   442-443. 
New     York     State,    banking    laws    of,     198- 
199,   285,    2S6,   521-523.   524-525.   536- 
537- 
banking   system    of,    191,    329,    363,   364, 

467-468. 
branch   banking  in,   285,   286. 
financial    position    of,    337. 
national   banks  in,   457. 
public   accountants   in,   6. 
savings    banks    in,    465. 
trust  companies   in,   457,    472-475,   552. 
New    York    State    Bankers'    Association,   on 
borrowers'     statements    as     basis     for 
credit,  44. 
New   York   Stock  Exchange,  406,   407,   516, 
520,   531-532. 
See  also   Stock   market. 
New     York    University,    business    education 

at,     11. 
North     Dakota,    trust    companies    in,    477. 
Norway,   uncovered   circulation  of,    170. 
See   also    Bank    of    Norway. 

Official    examinations.     Sec    Bank    examina- 
tions,   National    Bank    examiners. 
Ohio,    banking    law    of,    165,    199. 

banking    system    of,    191,    202. 

trust   companies   in,    556-557. 
Organization    in   business,    defects   in,    4. 
Oriental    banks,  20-21. 

Orient,  the,  as  a   field    for  American  trade, 
19-21,    23. 

lack  of  trust  companies   in   the,  478. 

Paine,    lion.    Willis   S.,    framer   of   bill    for 
banking    reform,    304. 
una  canal,   the,   373,   392. 
I 'mics,   conditions  leading  to,    163-164,    172- 
173.     243.     247,     278-279,     398,     440. 
effect   on    savings  banfcs,   573. 
ii  1  ■  itable   in    future,   216. 
in  Great   Britain,  i68-ifi9. 
in   United   States   (1837-1893),   201,  217, 
234-235.    243-244.    248,    278-279,    344, 
361.   370. 
panaceas     for,      163-175,      196,     216-223, 

233-235.    303.    306. 
redemption    of    greenbacks   in,    393. 


594 


INDEX 


Panics — under  branch  banking,   277-279. 

>.<•  also   Financial   crises. 
Parliament,      English,     enactment     by     on 

promissory  notes,    124. 
Pendleton,    Senator,    on    payment   of   bonds 

in    gre<  nbacks,    194. 
Pennsylvania,   banking  system   of,  329,   467. 

trust    companies    in,    473-475. 
Perry    on    Trusts,    on    delegation     of    dis- 
cretionary   trusts,    545. 
Pittsburg,    as    a    financial    center,    139,    141, 

145,    146,    577-578. 
Politics,  as  a  cause  of  defalcations,  88,  91. 
in    bank    examinations,    98-99,    119. 
in    connection    with    gold    standard    act, 

230. 
in   connection   with    greenbacks,    294-295. 
in   currency    reform    problem,    423. 
in   national   banking   system,   98-99,    112- 
119,  218-219,  238. 
Pooling   agreements,    226. 
Post    office    Department,    receipts   of    in    re- 
lation to  volume  of  business,  451. 
Powers     of     attorney     from     executors    and 

trustees,  542-552. 
Prices,     relation     of     to    gold    supply,    433- 

437,    439.    44=- 

Private    banks,    114-117,    469. 

Production   in   United   States,   3. 

Promissory    notes,    evolution    of,    123-124. 
in   United   States,   65,    126-131. 

Public    accountants.     See    Accountants,    ex- 
pert. 

Public    debt,     185-187,     192,     297,     360-361, 
373,    4i5-4i6,    459-46o. 

Publicity.     See    Supervision    and    publicity. 

Public   utilities,    113-114,    223-224. 

Pugsley,     Cornelius     A.,     banking     reform 
law    introduced    by,    304. 

Quigley,     Edwin     O.,     bond     forgeries    by, 
502-503. 

Rackemann,    Felix,   on   transfer   agents  and 
registrars    of    stock,    515-516. 

Railroad  earnings,   recent  statistics  of,   450- 
45i. 

Raleigh,  Sir  Walter,  on  control  of  the  sea, 
220-221. 

Real    estate    loans,    404-405. 

Receivers,    540,    541. 

Redemption  equipment  of  banks,  38,  39-40, 
43- 

Registrars    of    stock,    515-521,    526-529. 

Rcichsbank.     See    Imperial    Bank    of    Ger- 
many. 

Republicans,    the,    on    recent    bond    exten- 
sion, 371. 

Reserve   cities,   244,   245,  248. 

Reserves, 
of  banks. 


Reserves — as    index    of    approaching    crisis, 

177- 
in   reserve  cities,   225. 
laws    in    regulation   of,    165-166     213, 

359-360,    470-471- 
bank    notes    as,    303,    368-369. 
character    of    discussed,     319-322. 
fluctuations    in,    385-386. 
in    Canada,    241-242. 
necessity   of,    454. 
place    of    in    our    financial     system, 

382. 
under     branch-banking    system,    239- 

247,    248. 
under   Fowler  banking  bill,   333. 
use  of  gold   for,   435-436. 
waste  in  present  system,   220-410. 
of    trust    companies,    460-461,    463,    573. 
Ricardo,   cited   on   monetary   science,   327. 
Ridgely,    Hon.    William    B.,    on    bank    fail- 
ures and  defalcations,   74,  88,   95-96, 
164. 
on    expert    bank    examinations,    95-96. 
on    losses   of    national    bank    depositors, 

153-154- 
on    national    banking    system,    167. 
Root,   L.   Carroll,   on   New  York  bank  note 
guaranty    fund    system,    199. 
on   the   Imperial   Bank  of  Germany,   331. 
Russia,    depreciation    of    national    securities 
of,    459. 
financial   condition  of,   185. 
gold   money    of,    379. 
uncovered   circulation   of,    170. 
See  also   Imperial    Bank   of   Russia. 

St.    John,    William    P.,    on    Quigley    bond 

forgery,   502-503. 
St.    Louis,   as   a   central   reserve   city,  225. 

banks  and  trust  companies  of,   458. 
Savings  banks,  79,  165,   167,  460,  465,  572- 

574- 
Schuyler    frauds,    516,    524,    529-530. 
Scotland,  asset  currency  in,  290,  330. 
bank   failures   in;   256,   258. 
banking    laws   of,    212-213. 
banks   of,    330. 
general  banking  system  of,  211-222,  258- 

259,    266,    309,    334. 
See   also    Bank   of   Scotland. 
Secretary    of    the    Treasury,    acceptance    by 
of    municipal    bonds,    501. 
action     by     regarding     circulation,     361- 

362,    371-372,    412-413-     427-428. 
control     of    over    emergency    currency, 

172,    306-307. 
on    central    redemption    of    bank    notes, 

369-370. 
on     growth     of     trust     companies     and 
national   banks,   457-458. 
Securities,    26,    62-66,    501-507. 
See  also  Collaterals,  Loans. 


INDEX 


595 


Shaw,   Secretary,  an  advocate  of  asset  cur- 
rency, 364- 

as  a  public  officer,   428. 

on    federal    incorporation    of   trust   com- 
panies,  458-459. 

on   notes  of   failed  banks,   367. 

on   taxing   bank   issues,    394- 

securities  accepted   by,    14. 

Sherman   law,  the,  294,  229,  372. 

Silver   certificates,    character   of,    228. 

Silver,   coinage   of,    187,    189,   3*9.   375-376. 

399- 
Smith,    Adam,    cited    on    monetary    science, 

327- 
Societe    Generale,   methods   of,   486. 

Spanish    War,    the,    361,    370,    373- 

Speculation,    a   necessary   evil,    324. 

as    a    cause    of    defalcations,    87,    89-90, 
92. 

birth   and    development   of,    430-431- 

compared   with   finance,   35-36. 

culmination    of,    440. 

dangers    of,    33934I.    453-454- 

in    financial    banking,    36,   37. 

outlook    for    near    future,    443. 
Stagnation,   periods  of,    16,    17- 
Standard    Dictionary,    on    panic    conditions, 

163. 
btandard    Oil    banks,    New    York    City,    36- 

37- 
State   Bank  of   Indiana,  298,  301,  332,  333. 

334- 
State    banks,    failures    of,    164. 

former     confusion    among,    300-301. 

functions  of,   463. 

in    the    early   eighties,    465. 

management    of,    202-203. 

recent  increase   in   deposits  of,  450. 

tax  on  circulation  of,   191,  229,  235. 
Stewart,   A.    T.,    on    advertising,    578-579- 
Stewart,    Mr.,   as   a    financial   leader,   468. 

on    trust    company    management,    469- 
Stickncy,   Mr.,   cited    on    national   bank   sys- 
tem,   279-280. 

cited  on    panic  of   1893,   278-279. 
Stockholders,    relations   of  to   banks,   77-78, 
81,    82-87. 

relation  of  to  corporations,    53'- 

responsibility    of   registrars    of   stock   to, 

516,    5'7- 
responsibility  of  transfer  agent   to,    510. 

5I2-5I5- 
rights  of,    5. 
Sec  also  Dividends. 
Stock   market,    influence    of,   35. 
Stock,     registration     and     transfer    of,     5*5- 
526,     530532.     534-535- 
Sec    also    Transfer    agents    and     K^'is- 
trars   of   stock. 
Sub    treasuries,    219,    230,    23J,    406.    4°7- 
See    also    United    States    Treasury. 


Suffolk    bank    system,    201-202,    256,    270, 

299-300,    301.    322,    332,    37°- 
Sumner,     Professor,     cited     on     monetary 
science,   327-328. 
on  duty  of  banks  in  panics,  168. 
Supervision     and     publicity,     4-6,     113-121, 

166-167. 
Supreme    Court    of    the    United    States,    on 
current  funds,   129. 
on   railroad   traffic   rates,   226. 
Surplus,   importance   of   to   banks,   84-87. 
Sweden,  state  banks  of,  332. 

Tappen,    Frederick   D.,   tribute   to,   282-283. 
Tennessee,  trust  companies   in,  476. 
Thery,    Prof.    Edmund,    on   recent    increase 

of    gold,    329. 
Thurmah,    Senator,    on    payment    of    bonds 

in   greenbacks,    194- 
Transfer    agents,    507-515.     5*6,    5'7.    518, 

520-521,    526,    531. 
Transportation   in   the    United    States,   3- 
Treasury    system    of    United     States,    eco- 
nomic  waste  of,    180-187. 
See   also    United    States    Treasury. 
Trust    companies,    acting    under    mortgages 
securing    bonds,     557-562. 
advertising    of,    568,    575,    578-579.    580- 

585- 
as     registrars    of    stock,     5 1 5-519.     53°- 

534.    535- 
as    transfer    agents,    507-515.    S1^,    5!7, 

518,    521-523.    530-534.    535- 
bond  departments  of,   567. 
collection   departments   of,    568. 
deposits    of,    572-573- 
development    of,    465-469,    556-557- 
essentials     for,     of    certain    instruments, 

562-563. 
examinations    of,    489-496,     553"5S6. 
failures   of,    472-478.    553-554.    557,    573- 
financial    departments    of,    567- 
foreign    analogues    of,    479-488. 
foreign    branches    of,    481. 
forms    of    transacting   business   of,    492- 

493.  497-500. 
functions    of,     463.     466-467,    483,    49'. 

557.    563.    566,    571- 
growth     and      importance     of,      457-460, 

494.  553-554- 
interest   on    deposits   in,    79-80. 
l.ul;   of   in   foreign   countries,    478. 
liability   as  to  trust  funds,  548-552- 
management  of,  490. 

ice    rule    of,    573-574- 
origin     cf,    472-473- 

ier     attitude     of     toward     corporate 

enterprises,  563-566. 

real    (state    departments    of,    566-570. 

relations    of    to    banks,    33-34.    460-464, 

469,     470-471,    489-490,     491-492,     494- 

reserves   requirements   for,   165-166,   167. 


596 


INDEX 


1'rust   companies — safe    deposit    departments 
of,    568,   57$-579- 
saving   departments  of,   571-575. 

cial      authorization      of      in      certain 
states,     553. 
specimen    statement    of,    554-555. 
trust    departments    of,    566. 
underlying    ideas   of,    478-479. 
varied   business  of,   49-'. 
Trustees,    authority    of    discussed,    542-548. 

SS2- 

Trustees     of     financial     institutions,     duties 

of,    553-556. 
Trust    funds,    delegation   of   trustees'    power 
over,    542-548,    depository's    liability    for, 

548-55^- 
Trusts.     See    Public    utilities. 

United  States,  banking  power  of,  458,   459. 
commerce    of,    3,     19,    20-21. 
contrasted     with     England     in    financial 

methods,    480. 
failures  of  trust  companies  and  national 

banks   in,    477. 
financial    condition   of,    185-187,    446-454. 
financial   rank   of,  238,   469. 
financial    system    of,    382-383,    459,    464- 

469. 
population  of,   360,  361,  449. 
recent   development   of,    179-180. 
United    States   bonds,    as   basis   for    circula- 
tion,    13,     189,     191,     192,    193-195,    266, 
268,    269,     303,    315,     345,     359.    360-363, 
370-371,    400,    406,    407,    409.    429.    45°- 
United    States    currency,    adequate    legisla- 
tion   needed    for,    310-311,    336-337,    401- 

405- 
as  credit   currency,   382-383. 
danger    of    inflation,    318,    323,    325. 
elasticity,      178-179,      302-303,      308-310, 
315.    316,    320-321,    325,    371,    383-394. 
398-400,    407,    409-410. 

conditions    necessary   for,    334-336. 
emergency   circulation,    364-366. 
issue    of    uncovered   notes   by   small 

banks,    323-324. 
need  of  more   fiat   money,  337-338- 
need  of  more   gold,   337-338. 
expansion   of  discussed,   362. 
fluctuations    in,    307,    384-387. 
importance   of   reform    of,    423-426. 
injudicious    use    of,    75-76. 
international  gold   transfer    system,   410- 

412. 
issue    of    $5    and    $10    gold    certificates, 

414-415,    422. 
lack    of    system   in,    229. 
paper   currency    discussed,    321-323,    377- 
present    conditions,     339-34L     405-407- 
recent   tendencies  in,   226-327. 


United      States      currency — regulation      of 
under   panic   conditions,    1 71-175. 
remedies    for     defects    suggested,    407- 

413. 
uses   for  in   business,  discussed,   319-321. 
volume     of     discussed,     75-76,     393-396, 
449-450. 
United    States    Supreme    Court,    on    regis- 
tration and  transfer  of  stock,  523,  525. 
United    States    Treasury,    as    a    support    to 
the     banks,     389-393,     394. 
currency   provided   by,   395. 
defects   of  system,   219,   230,   231,   308. 
deposit    system    for    surplus    funds,    387- 

393.     415-417.     422,    427-428. 
fluctuations  in  current  demands  on,  384. 
functions   of   summarized,    296. 
influence   of  on  currency  question,   204- 

205. 
limitations  of,  287. 

place   of  in  our  financial   system,  382. 
the      only      national      treasury      in      the 
world,  212. 
United    Kingdom,    commerce    of    in    manu- 
factures.   19. 
University    of    California,    business    educa- 
tion at,   n. 
University    of    Chicago,    business    education 

at,    11. 
University   of   Pennsylvania,   business    edu- 
cation  at,    11. 
University    of    Wisconsin,    business    educa- 
tion at,   11. 

VanBuren,    Mr.,    action    of    on    bank-note 

guaranty    fund,    199. 
Yanderlip,    Frank    A.,    Wilmington    address 

of,    341. 
Vermont,    failures    of    trust    companies    in, 

475- 
Virginia,    fraudulent    bonds    of,    504. 

trust  companies  in,  476. 
Volume    of    business,    connection    of    with 

banking  capital,   37-43. 

Walker    banking    reform    bill,    304. 

Wall    Street,   banking  conditions  in,   3,   23- 

37- 
effect   of    subtreasury    system   on,    406. 
Washington,    the    place    of   central    redemp- 
tion,  370. 
West   Virignia,    trust   companies   in,    476. 
White,  Horace,  on   State   Bank  of  Indiana, 

333- 
Wisconsin,    banking    laws    of,     165,    191. 

state  banks  of,  203. 
Witham,    W.    S.,   experience    of    in    branch 

banking,    261. 
Wyoming,    trust  companies  in,   477> 


The  Modern 
Trust    Compa 

BY 

F.  B.  KIRKBRIDE, 

Formerly  Treaszirer  of  the  Pe?insylvania  Company  for  Insurance  on 
Lives  and  Granting  Annuities  (Trust  and  Safe  Deposit  Co.)  and 

J.  E.  STERRETT,  C.  P.  A. 

Chairman  Congress  of  Accountants,  St.  Louis,  1904-.  President 
Pennsylva?iia  Institute  of  Certified  Public  Accountants,  Metnber 
Pennsylvania  State  Board  of  Examiners  of  Public  Accountants. 

Cloth,  8Vo,  $2.50  net  {postage,  15c.) 


"It  involves  no  disparagement  to  the  many  excellent  treatises  on 
banking  and  currency  to  say  that  this  book,  from  the  stand- 
point of  a  practical  working-  manual,  is  the  best  treatise  hither- 
to published.  It  is  a  compact  treatise  on  corporations,  and  an 
excellent  treatise  on  the  management  of  the  banking  business. 
The  functions  which  are  peculiar  to  the  trust  company  receive 
comprehensive  treatment,  extending  not  merely  to  directions 
as  to  management,  but  containing  also  all  the  forms  necessary 
for  the  equipment  of  other  departments  in  the  institution." 
—  The  Journal  of  Accountaiicy . 

"It  is  so  complete  and  lucid  that  it  should  serve  as  a  standard  guide, 
not  only  to  the  public,  but  to  students  of  banking  and  finance, 
and  deserves  wide  recognition  as  an  authoritative  text-book. 
No  detail  of  trust  company  functioning  appears  to  have  escaped 
the  authors,  who  further  proffer  numerous  suggestions  of  solid 
value  to  the  management  of  such  concerns.  The  point  of  view 
is  soundly  conservative,  and  there  is  little  theorizing,  concrete- 
ness  being  the  distinguishing  characteristic  throughout." — The 
Outlook. 


THE,  MACMILLAN  COMPANY 

6466  FIFTH  AVENUE  NEW  YORK 


Books  of  High  Reference=Value 
to  Men  of  Financial  Interests 

HAMILTON— Savings  and  Saving  Institutions— 

By  James  Henry  Hamilton,  Ph.D.,  formerly  of  Syracuse 
University.  Cloth,  8vo,  436  pp.,  $2.25  net  (postage  15c.) 

"The  first  comprehensive  monograph  on  this  subject  including  municipal  and 
postal  savings  banks.  For  the  breadth  of  its  investigation  and  the  scientific 
spirit  by  which  it  is  characterized,  Prof.  Hamilton's  contribution  to  this  subject 
is  entitled  to  the  highest  rank.  The  work  may  be  read  with  profit  by  all  who 
desire  a  thorough  comprehension  of  the  principles  governing  savings  banks  and 
the  most  practicable  method  of  applying  them." — Banker  s  Magazine. 

HEPBURN  -Contest   for  Sound  Money.      By  A. 

Burton  Hepburn,  Ph.D.,  ex-Comptroller  of  the  Currency,  ex- 
Superintendent  Banking-  Department  of  the  State  of  New  York, 
President  Chase  National  Bank. 

Cloth,  12mo,  $2.00  net  (postage,  19c.) 

This  is  the  most  concise  yet  comprehensive  account  of  the  whole  evolution  of 
our  monetary  system  ;  it  presents  all  the  law  bearing  directly  on  the  full  under- 
standing of  the  subject  ;  it  follows  such  a  method  of  treating  the  mass  of  hitherto 
inaccessible  information  that  any  business  man  can  follow  it  with  interest  and 
form  an  intelligent  opinion  as  to  the  policy  necessary  to  remedy  the  defects  in 
our  paper  currency. 

KINLEY— Money :  A  Study  of  the  Theory  of  the 
Medium  of  Exchange.      By  David  Kinley,  Ph.D. 

The  Citizen's  Library.       Half  leather,  $1.25  net  {postage  10c) 

This  is  a  systematic,  clearly  reasoned  statement  of  first  principles  ;  a  useful 
introduction  to  the  study  of  more  exhaustive  works. 

NORTON— Statistical  Studies  in  the  New  York 
Money  Market.     By  John  Pease  Norton. 

Cloth,  8vo,  $1.50  net;  paper,  $1.00  net  {postage  8c.) 

WALSH— The  Fundamental   Problem  in  Mone- 
tary Science.     By  Correa  Moylan  Walsh. 

Cloth,  127)io,  383  pp.,  $1.50  net  (postage  13c.) 

The  Measurement  of  General  Exchange«Value, 
1901.     By  Correa  Moylan  Walsh. 

Cloth,  8vo,  xvi+580  pp.,  $3.00  net  (postage  26c.) 

"It  treats  far  more  completely  than  any  other  previous  work  of  the  fluctuation 
in  price  levels  and  the  construction  of  'index  numbers.'  The  author  seems  to 
have  made  acquaintance  with  practically  the  whole  literature  of  his  subject.  .  .  . 
His  copious  bibliography,  covering  one  hundred  and  forty-one  titles,  is  in  itself 
of  sufficient  value  to  make  the  book  a  useful  work  of  reference.  .  .  .  The  book 
will  doubtless  remain  for  many  years  as  the  standard  and  most  exhaustive 
treatise  on  the  subject  with  which  it  deals."  The  Yale  Review. 

THE  MACMILLAN  COMPANY 

64-66   FIFTH  AVENUE.,  NEW  YORK 


MU 


tta3AINIH\W 


I 


^ 


%miiv;hov 


Y?  -— '  >    « 


LOSANCEL 


>^ 


so 


^ajAiNn  3v\v 


1BRARY0/ 


CALIFOftfc 


'JESS®** 


AA 


?£GJ<?NAL 


°00  712 


(£Bftoto 


facil 


ity 


883 


